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Is Columbus McKinnon Corporation's (NASDAQ:CMCO) Capital Allocation Ability Worth Your Time?

Simply Wall St
·4 min read

Today we'll evaluate Columbus McKinnon Corporation (NASDAQ:CMCO) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First, 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 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 Columbus McKinnon:

0.099 = US$92m ÷ (US$1.1b - US$155m) (Based on the trailing twelve months to March 2020.)

So, Columbus McKinnon has an ROCE of 9.9%.

View our latest analysis for Columbus McKinnon

Is Columbus McKinnon's ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, Columbus McKinnon's ROCE appears to be around the 10.0% average of the Machinery industry. Aside from the industry comparison, Columbus McKinnon'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.

In our analysis, Columbus McKinnon's ROCE appears to be 9.9%, compared to 3 years ago, when its ROCE was 4.9%. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Columbus McKinnon's past growth compares to other companies.

NasdaqGS:CMCO Past Revenue and Net Income June 18th 2020
NasdaqGS:CMCO Past Revenue and Net Income June 18th 2020

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, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

How Columbus McKinnon's Current Liabilities Impact 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. 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.

Columbus McKinnon has total assets of US$1.1b and current liabilities of US$155m. Therefore its current liabilities are equivalent to approximately 14% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

What We Can Learn From Columbus McKinnon's ROCE

With that in mind, we're not overly impressed with Columbus McKinnon's ROCE, so it may not be the most appealing prospect. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email 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. 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.