Today we’ll evaluate C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) to determine whether it could have potential as an investment idea. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Then we’ll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for C.H. Robinson Worldwide:
0.29 = US$775m ÷ (US$4.5b – US$1.5b) (Based on the trailing twelve months to September 2018.)
Therefore, C.H. Robinson Worldwide has an ROCE of 29%.
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Does C.H. Robinson Worldwide Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. C.H. Robinson Worldwide’s ROCE appears to be substantially greater than the 9.3% average in the Logistics industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Putting aside its position relative to its industry for now, in absolute terms, C.H. Robinson Worldwide’s ROCE is currently very good.
As we can see, C.H. Robinson Worldwide currently has an ROCE of 29%, less than the 48% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for C.H. Robinson Worldwide.
C.H. Robinson Worldwide’s Current Liabilities And Their Impact On Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
C.H. Robinson Worldwide has total assets of US$4.5b and current liabilities of US$1.5b. Therefore its current liabilities are equivalent to approximately 34% of its total assets. C.H. Robinson Worldwide’s ROCE is boosted somewhat by its middling amount of current liabilities.
What We Can Learn From C.H. Robinson Worldwide’s ROCE
Still, it has a high ROCE, and may be an interesting prospect for further research. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.