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Is Fortress Transportation and Infrastructure Investors LLC (NYSE:FTAI) Struggling With Its 2.5% Return On Capital Employed?

Simply Wall St

Today we are going to look at Fortress Transportation and Infrastructure Investors LLC (NYSE:FTAI) 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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.'

How Do You Calculate Return On Capital Employed?

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 Fortress Transportation and Infrastructure Investors:

0.025 = US$65m ÷ (US$3.1b - US$553m) (Based on the trailing twelve months to June 2019.)

Therefore, Fortress Transportation and Infrastructure Investors has an ROCE of 2.5%.

Check out our latest analysis for Fortress Transportation and Infrastructure Investors

Is Fortress Transportation and Infrastructure Investors's ROCE Good?

One way to assess ROCE is to compare similar companies. In this analysis, Fortress Transportation and Infrastructure Investors's ROCE appears meaningfully below the 8.8% average reported by the Trade Distributors industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how Fortress Transportation and Infrastructure Investors compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.7% available in government bonds. There are potentially more appealing investments elsewhere.

Fortress Transportation and Infrastructure Investors delivered an ROCE of 2.5%, which is better than 3 years ago, as was making losses back then. That implies the business has been improving. You can click on the image below to see (in greater detail) how Fortress Transportation and Infrastructure Investors's past growth compares to other companies.

NYSE:FTAI Past Revenue and Net Income, September 1st 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. 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 Fortress Transportation and Infrastructure Investors.

How Fortress Transportation and Infrastructure Investors's Current Liabilities Impact Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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.

Fortress Transportation and Infrastructure Investors has total liabilities of US$553m and total assets of US$3.1b. As a result, its current liabilities are equal to approximately 18% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.

What We Can Learn From Fortress Transportation and Infrastructure Investors's ROCE

While that is good to see, Fortress Transportation and Infrastructure Investors has a low ROCE and does not look attractive in this analysis. Of course, you might also be able to find a better stock than Fortress Transportation and Infrastructure Investors. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are 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 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.