A Close Look At eBay Inc.’s (NASDAQ:EBAY) 17% ROCE
Today we'll look at eBay Inc. (NASDAQ:EBAY) and reflect on its potential as an investment. 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. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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'.
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 eBay:
0.17 = US$2.4b ÷ (US$18b - US$4.1b) (Based on the trailing twelve months to December 2019.)
So, eBay has an ROCE of 17%.
See our latest analysis for eBay
Is eBay's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, eBay's ROCE is meaningfully higher than the 7.1% average in the Online Retail 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. Separate from eBay's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
In our analysis, eBay's ROCE appears to be 17%, compared to 3 years ago, when its ROCE was 12%. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how eBay'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. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for eBay.
eBay'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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
eBay has total assets of US$18b and current liabilities of US$4.1b. Therefore its current liabilities are equivalent to approximately 22% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
Our Take On eBay's ROCE
This is good to see, and with a sound ROCE, eBay could be worth a closer look. There might be better investments than eBay out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
I will like eBay better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
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