Today we'll look at Cinemark Holdings, Inc. (NYSE:CNK) and reflect on its potential as an investment. 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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?
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 Cinemark Holdings:
0.063 = US$316m ÷ (US$5.6b - US$600m) (Based on the trailing twelve months to March 2020.)
So, Cinemark Holdings has an ROCE of 6.3%.
Does Cinemark Holdings Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Cinemark Holdings's ROCE appears meaningfully below the 11% average reported by the Entertainment industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Setting aside the industry comparison for now, Cinemark Holdings's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
Cinemark Holdings's current ROCE of 6.3% is lower than its ROCE in the past, which was 12%, 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Cinemark Holdings's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Cinemark Holdings's Current Liabilities Impact 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Cinemark Holdings has total assets of US$5.6b and current liabilities of US$600m. Therefore its current liabilities are equivalent to approximately 11% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.
What We Can Learn From Cinemark Holdings's ROCE
With that in mind, we're not overly impressed with Cinemark Holdings's ROCE, so it may not be the most appealing prospect. Of course, you might also be able to find a better stock than Cinemark Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.