U.S. Markets closed

Evaluating Werner Enterprises, Inc.’s (NASDAQ:WERN) Investments In Its Business

Simply Wall St

Today we'll look at Werner Enterprises, Inc. (NASDAQ:WERN) 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. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding 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. In brief, it is a useful tool, but it is not without drawbacks. 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?

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 Werner Enterprises:

0.12 = US$236m ÷ (US$2.1b - US$229m) (Based on the trailing twelve months to June 2019.)

Therefore, Werner Enterprises has an ROCE of 12%.

See our latest analysis for Werner Enterprises

Does Werner Enterprises Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. We can see Werner Enterprises's ROCE is around the 11% average reported by the Transportation industry. Regardless of where Werner Enterprises sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

You can see in the image below how Werner Enterprises's ROCE compares to its industry. Click to see more on past growth.

NasdaqGS:WERN Past Revenue and Net Income, September 23rd 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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 Werner Enterprises.

What Are Current Liabilities, And How Do They Affect Werner Enterprises's 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.

Werner Enterprises has total assets of US$2.1b and current liabilities of US$229m. As a result, its current liabilities are equal to approximately 11% of its total assets. Low current liabilities are not boosting the ROCE too much.

Our Take On Werner Enterprises's ROCE

Overall, Werner Enterprises has a decent ROCE and could be worthy of further research. Werner Enterprises looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

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 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. Thank you for reading.