Is IES Holdings, Inc.’s (NASDAQ:IESC) 14% ROCE Any Good?
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Today we'll look at IES Holdings, Inc. (NASDAQ:IESC) and reflect on its potential as an investment. 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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 IES Holdings:
0.14 = US$37m ÷ (US$417m - US$163m) (Based on the trailing twelve months to March 2019.)
Therefore, IES Holdings has an ROCE of 14%.
See our latest analysis for IES Holdings
Does IES Holdings Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, IES Holdings's ROCE is meaningfully higher than the 9.5% average in the Construction industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how IES Holdings compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
The image below shows how IES Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. How cyclical is IES Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
IES Holdings'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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
IES Holdings has total liabilities of US$163m and total assets of US$417m. As a result, its current liabilities are equal to approximately 39% of its total assets. With this level of current liabilities, IES Holdings's ROCE is boosted somewhat.
Our Take On IES Holdings's ROCE
IES Holdings's ROCE does look good, but the level of current liabilities also contribute to that. There might be better investments than IES Holdings 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.
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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 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.
