Today we'll look at Expeditors International of Washington, Inc. (NASDAQ:EXPD) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect 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. Ultimately, it is a useful but imperfect metric. 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'.
How Do You Calculate Return On Capital Employed?
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 Expeditors International of Washington:
0.32 = US$803m ÷ (US$3.7b - US$1.2b) (Based on the trailing twelve months to September 2019.)
So, Expeditors International of Washington has an ROCE of 32%.
Does Expeditors International of Washington Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Expeditors International of Washington's ROCE is meaningfully better than the 12% average in the Logistics 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, Expeditors International of Washington's ROCE is currently very good.
The image below shows how Expeditors International of Washington's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Expeditors International of Washington.
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. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Expeditors International of Washington has total liabilities of US$1.2b and total assets of US$3.7b. As a result, its current liabilities are equal to approximately 32% of its total assets. Expeditors International of Washington has a medium level of current liabilities, boosting its ROCE somewhat.
The Bottom Line On Expeditors International of Washington's ROCE
Despite this, it reports a high ROCE, and may be worth investigating further. Expeditors International of Washington 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.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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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