A Close Look At The Western Union Company’s (NYSE:WU) 31% ROCE
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Today we’ll look at The Western Union Company (NYSE:WU) 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 of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting 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. All else being equal, a better business will have a higher ROCE. 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 Western Union:
0.31 = US$1.1b ÷ (US$9.0b – US$5.4b) (Based on the trailing twelve months to December 2018.)
Therefore, Western Union has an ROCE of 31%.
Check out our latest analysis for Western Union
Is Western Union’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Western Union’s ROCE is meaningfully higher than the 10% average in the IT industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, Western Union’s ROCE is currently very good.
Our data shows that Western Union currently has an ROCE of 31%, compared to its ROCE of 22% 3 years ago. This makes us think the business might be improving.
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 Western Union.
What Are Current Liabilities, And How Do They Affect Western Union’s 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Western Union has total assets of US$9.0b and current liabilities of US$5.4b. As a result, its current liabilities are equal to approximately 60% of its total assets. While a high level of current liabilities boosts its ROCE, Western Union’s returns are still very good.
Our Take On Western Union’s ROCE
So to us, the company is potentially worth investigating further. Of course you might be able to find a better stock than Western Union. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Western Union better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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 editorial-team@simplywallst.com.
