Today we are going to look at GP Strategies Corporation (NYSE:GPX) to see whether it might be an attractive investment prospect. 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, 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.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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 GP Strategies:
0.045 = US$15m ÷ (US$450m - US$108m) (Based on the trailing twelve months to September 2019.)
Therefore, GP Strategies has an ROCE of 4.5%.
Is GP Strategies's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, GP Strategies's ROCE appears meaningfully below the 11% average reported by the Professional Services industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how GP Strategies stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.
GP Strategies's current ROCE of 4.5% is lower than 3 years ago, when the company reported a 20% ROCE. This makes us wonder if the business is facing new challenges. The image below shows how GP Strategies's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for GP Strategies.
GP Strategies's Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
GP Strategies has total assets of US$450m and current liabilities of US$108m. Therefore its current liabilities are equivalent to approximately 24% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.
Our Take On GP Strategies's ROCE
That's not a bad thing, however GP Strategies has a weak ROCE and may not be an attractive investment. You might be able to find a better investment than GP Strategies. 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.
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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