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Is GDI Integrated Facility Services Inc. (TSE:GDI) Struggling With Its 7.0% Return On Capital Employed?

Simply Wall St

Today we'll look at GDI Integrated Facility Services Inc. (TSE: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.

First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on 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. Ultimately, it is a useful but imperfect metric. 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 GDI Integrated Facility Services:

0.07 = CA$31m ÷ (CA$612m - CA$177m) (Based on the trailing twelve months to June 2019.)

So, GDI Integrated Facility Services has an ROCE of 7.0%.

See our latest analysis for GDI Integrated Facility Services

Does GDI Integrated Facility Services Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, GDI Integrated Facility Services's ROCE appears meaningfully below the 8.9% average reported by the Commercial Services industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Aside from the industry comparison, GDI Integrated Facility Services's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

In our analysis, GDI Integrated Facility Services's ROCE appears to be 7.0%, compared to 3 years ago, when its ROCE was 4.4%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how GDI Integrated Facility Services's ROCE compares to its industry. Click to see more on past growth.

TSX:GDI Past Revenue and Net Income, August 15th 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 only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for GDI Integrated Facility Services.

GDI Integrated Facility Services's Current Liabilities And Their Impact On 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. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

GDI Integrated Facility Services has total liabilities of CA$177m and total assets of CA$612m. As a result, its current liabilities are equal to approximately 29% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

Our Take On GDI Integrated Facility Services's ROCE

With that in mind, we're not overly impressed with GDI Integrated Facility Services's ROCE, so it may not be the most appealing prospect. You might be able to find a better investment than GDI Integrated Facility Services. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.