Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Today we are going to look at Expeditors International of Washington, Inc. (NASDAQ:EXPD) to see whether it might be an attractive investment prospect. 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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?
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 Expeditors International of Washington:
0.33 = US$791m ÷ (US$3.6b - US$1.2b) (Based on the trailing twelve months to March 2019.)
So, Expeditors International of Washington has an ROCE of 33%.
Does Expeditors International of Washington Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Expeditors International of Washington's ROCE is meaningfully better than the 11% average in the Logistics industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, Expeditors International of Washington's ROCE in absolute terms currently looks quite high.
It is important to remember that ROCE shows past performance, and is 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Expeditors International of Washington's Current Liabilities Skew 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.
Expeditors International of Washington has total assets of US$3.6b and current liabilities of US$1.2b. As a result, its current liabilities are equal to approximately 34% of its total assets. A medium level of current liabilities boosts Expeditors International of Washington's ROCE somewhat.
What We Can Learn From Expeditors International of Washington's ROCE
Despite this, it reports a high ROCE, and may be worth investigating further. There might be better investments than Expeditors International of Washington 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 Expeditors International of Washington better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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 email@example.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.