Today we'll evaluate MSA Safety Incorporated (NYSE:MSA) to determine whether it could have potential as an investment idea. 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. Second, we'll look at its ROCE compared to similar companies. 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 measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 MSA Safety:
0.18 = US$256m ÷ (US$1.7b - US$262m) (Based on the trailing twelve months to September 2019.)
Therefore, MSA Safety has an ROCE of 18%.
Is MSA Safety's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that MSA Safety's ROCE is meaningfully better than the 9.4% average in the Commercial Services industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Independently of how MSA Safety compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
In our analysis, MSA Safety's ROCE appears to be 18%, compared to 3 years ago, when its ROCE was 14%. This makes us wonder if the company is improving. You can see in the image below how MSA Safety's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for MSA Safety.
MSA Safety'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. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
MSA Safety has total liabilities of US$262m and total assets of US$1.7b. As a result, its current liabilities are equal to approximately 15% of its total assets. Low current liabilities are not boosting the ROCE too much.
What We Can Learn From MSA Safety's ROCE
Overall, MSA Safety has a decent ROCE and could be worthy of further research. There might be better investments than MSA Safety out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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.
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