Today we are going to look at HC2 Holdings, Inc. (NYSE:HCHC) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared 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 amount of pre-tax profits a company can generate from the capital employed 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?
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 HC2 Holdings:
0.0033 = US$22m ÷ (US$6.9b - US$339m) (Based on the trailing twelve months to June 2019.)
So, HC2 Holdings has an ROCE of 0.3%.
Does HC2 Holdings Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see HC2 Holdings's ROCE is meaningfully below the Construction industry average of 9.7%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how HC2 Holdings stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
HC2 Holdings delivered an ROCE of 0.3%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving. You can see in the image below how HC2 Holdings's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. 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.
How HC2 Holdings's Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.
HC2 Holdings has total assets of US$6.9b and current liabilities of US$339m. Therefore its current liabilities are equivalent to approximately 4.9% of its total assets. HC2 Holdings has very few current liabilities, which have a minimal effect on its already low ROCE.
Our Take On HC2 Holdings's ROCE
Nevertheless, there are potentially more attractive companies to invest in. You might be able to find a better investment than HC2 Holdings. 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).
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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.