Today we'll evaluate Gencor Industries, Inc. (NASDAQ:GENC) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
So, How Do We Calculate ROCE?
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 Gencor Industries:
0.10 = US$16m ÷ (US$161m - US$8.5m) (Based on the trailing twelve months to March 2019.)
So, Gencor Industries has an ROCE of 10%.
Does Gencor Industries Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. We can see Gencor Industries's ROCE is around the 11% average reported by the Machinery industry. Setting aside the industry comparison for now, Gencor Industries's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
In our analysis, Gencor Industries's ROCE appears to be 10%, compared to 3 years ago, when its ROCE was 2.9%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Gencor Industries's past growth compares to other companies.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Gencor Industries has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Do Gencor Industries's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Gencor Industries has total liabilities of US$8.5m and total assets of US$161m. Therefore its current liabilities are equivalent to approximately 5.3% of its total assets. Gencor Industries reports few current liabilities, which have a negligible impact on its unremarkable ROCE.
What We Can Learn From Gencor Industries's ROCE
Based on this information, Gencor Industries appears to be a mediocre business. Of course, you might also be able to find a better stock than Gencor Industries. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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 firstname.lastname@example.org. 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.