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Has Fortune Brands Home & Security, Inc. (NYSE:FBHS) Been Employing Capital Shrewdly?

Simply Wall St

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Today we'll evaluate Fortune Brands Home & Security, Inc. (NYSE:FBHS) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. 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. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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 Fortune Brands Home & Security:

0.14 = US$720m ÷ (US$6.3b - US$1.2b) (Based on the trailing twelve months to March 2019.)

Therefore, Fortune Brands Home & Security has an ROCE of 14%.

View our latest analysis for Fortune Brands Home & Security

Is Fortune Brands Home & Security's ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, Fortune Brands Home & Security's ROCE appears to be around the 13% average of the Building industry. Independently of how Fortune Brands Home & Security compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

The image below shows how Fortune Brands Home & Security's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NYSE:FBHS Past Revenue and Net Income, July 18th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Fortune Brands Home & Security.

How Fortune Brands Home & Security's Current Liabilities Impact Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Fortune Brands Home & Security has total liabilities of US$1.2b and total assets of US$6.3b. As a result, its current liabilities are equal to approximately 20% of its total assets. Low current liabilities are not boosting the ROCE too much.

What We Can Learn From Fortune Brands Home & Security's ROCE

This is good to see, and with a sound ROCE, Fortune Brands Home & Security could be worth a closer look. There might be better investments than Fortune Brands Home & Security 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 Fortune Brands Home & Security 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 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.