Today we'll look at Gardner Denver Holdings, Inc. (NYSE:GDI) 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.
Firstly, we'll go over how we 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 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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?
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 Gardner Denver Holdings:
0.11 = US$425m ÷ (US$4.6b - US$591m) (Based on the trailing twelve months to June 2019.)
Therefore, Gardner Denver Holdings has an ROCE of 11%.
Does Gardner Denver Holdings Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. It appears that Gardner Denver Holdings's ROCE is fairly close to the Machinery industry average of 12%. Setting aside the industry comparison for now, Gardner Denver Holdings's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
We can see that , Gardner Denver Holdings currently has an ROCE of 11% compared to its ROCE 3 years ago, which was 4.9%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Gardner Denver Holdings's ROCE compares to its industry. Click to see more on 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. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Gardner Denver Holdings's Current Liabilities And Their Impact On 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Gardner Denver Holdings has total liabilities of US$591m and total assets of US$4.6b. As a result, its current liabilities are equal to approximately 13% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.
Our Take On Gardner Denver Holdings's ROCE
With that in mind, we're not overly impressed with Gardner Denver Holdings's ROCE, so it may not be the most appealing prospect. Of course, you might also be able to find a better stock than Gardner Denver Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Gardner Denver Holdings 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 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. Thank you for reading.