Today we'll look at Foundation Building Materials, Inc. (NYSE:FBM) and reflect on its potential as an investment. 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.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect 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. 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'.
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 Foundation Building Materials:
0.082 = US$97m ÷ (US$1.4b - US$269m) (Based on the trailing twelve months to September 2019.)
So, Foundation Building Materials has an ROCE of 8.2%.
Is Foundation Building Materials's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Foundation Building Materials's ROCE appears to be around the 9.4% average of the Trade Distributors industry. Aside from the industry comparison, Foundation Building Materials's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
We can see that, Foundation Building Materials currently has an ROCE of 8.2% compared to its ROCE 3 years ago, which was 2.4%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Foundation Building Materials's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. 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 Foundation Building Materials.
How Foundation Building Materials's Current Liabilities Impact Its 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.
Foundation Building Materials has total liabilities of US$269m and total assets of US$1.4b. As a result, its current liabilities are equal to approximately 19% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.
The Bottom Line On Foundation Building Materials's ROCE
If Foundation Building Materials continues to earn an uninspiring ROCE, there may be better places to invest. Of course, you might also be able to find a better stock than Foundation Building Materials. So you may wish to see this free collection of other companies that have grown earnings strongly.
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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