Today we'll look at FleetCor Technologies, Inc. (NYSE:FLT) 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 of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. 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. 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'.
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 FleetCor Technologies:
0.15 = US$1.2b ÷ (US$12b - US$4.0b) (Based on the trailing twelve months to September 2019.)
Therefore, FleetCor Technologies has an ROCE of 15%.
Is FleetCor Technologies's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, FleetCor Technologies's ROCE is meaningfully higher than the 12% average in the IT industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where FleetCor Technologies sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
We can see that, FleetCor Technologies currently has an ROCE of 15% compared to its ROCE 3 years ago, which was 11%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how FleetCor Technologies's ROCE compares to its industry. Click to see more on past growth.
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. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for FleetCor Technologies.
What Are Current Liabilities, And How Do They Affect FleetCor Technologies'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 counter this, investors can check if a company has high current liabilities relative to total assets.
FleetCor Technologies has total assets of US$12b and current liabilities of US$4.0b. Therefore its current liabilities are equivalent to approximately 33% of its total assets. FleetCor Technologies has a medium level of current liabilities, which would boost the ROCE.
Our Take On FleetCor Technologies's ROCE
FleetCor Technologies's ROCE does look good, but the level of current liabilities also contribute to that. FleetCor Technologies shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
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 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.
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