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Should You Like Grand Canyon Education, Inc.’s (NASDAQ:LOPE) High Return On Capital Employed?

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Today we are going to look at Grand Canyon Education, Inc. (NASDAQ:LOPE) to see whether it might be an attractive investment prospect. 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.

First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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 Grand Canyon Education:

0.22 = US$277m ÷ (US$1.3b - US$81m) (Based on the trailing twelve months to December 2018.)

Therefore, Grand Canyon Education has an ROCE of 22%.

View our latest analysis for Grand Canyon Education

Is Grand Canyon Education's ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, we find that Grand Canyon Education's ROCE is meaningfully better than the 11% average in the Consumer Services industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Grand Canyon Education's ROCE in absolute terms currently looks quite high.

Grand Canyon Education's current ROCE of 22% is lower than its ROCE in the past, which was 30%, 3 years ago. This makes us wonder if the business is facing new challenges.

NasdaqGS:LOPE Past Revenue and Net Income, April 30th 2019
NasdaqGS:LOPE Past Revenue and Net Income, April 30th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

What Are Current Liabilities, And How Do They Affect Grand Canyon Education's ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.

Grand Canyon Education has total assets of US$1.3b and current liabilities of US$81m. As a result, its current liabilities are equal to approximately 6.1% of its total assets. Grand Canyon Education has low current liabilities, which have a negligible impact on its relatively good ROCE.

What We Can Learn From Grand Canyon Education's ROCE

This is an attractive combination and suggests the company could have potential. Grand Canyon Education looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.

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