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Cardtronics plc’s (NASDAQ:CATM) Investment Returns Are Lagging Its Industry

Simply Wall St

Today we are going to look at Cardtronics plc (NASDAQ:CATM) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Cardtronics:

0.065 = US$89m ÷ (US$1.8b - US$418m) (Based on the trailing twelve months to June 2019.)

Therefore, Cardtronics has an ROCE of 6.5%.

View our latest analysis for Cardtronics

Does Cardtronics Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. We can see Cardtronics's ROCE is meaningfully below the IT industry average of 9.9%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how Cardtronics stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.

Cardtronics's current ROCE of 6.5% is lower than 3 years ago, when the company reported a 17% ROCE. This makes us wonder if the business is facing new challenges. The image below shows how Cardtronics's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NasdaqGS:CATM Past Revenue and Net Income, September 18th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Cardtronics.

Do Cardtronics's Current Liabilities Skew Its ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Cardtronics has total assets of US$1.8b and current liabilities of US$418m. As a result, its current liabilities are equal to approximately 24% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

The Bottom Line On Cardtronics's ROCE

That said, Cardtronics's ROCE is mediocre, there may be more attractive investments around. You might be able to find a better investment than Cardtronics. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.