Today we'll look at Ituran Location and Control Ltd. (NASDAQ:ITRN) and reflect on its potential as an investment. 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 up, we'll look at what ROCE is and how we calculate it. 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.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
So, How Do We Calculate ROCE?
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 Ituran Location and Control:
0.22 = US$59m ÷ (US$382m - US$108m) (Based on the trailing twelve months to June 2019.)
Therefore, Ituran Location and Control has an ROCE of 22%.
Is Ituran Location and Control's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Ituran Location and Control's ROCE is meaningfully higher than the 6.6% average in the Communications industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Ituran Location and Control's ROCE currently appears to be excellent.
Ituran Location and Control's current ROCE of 22% is lower than 3 years ago, when the company reported a 39% ROCE. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Ituran Location and Control's ROCE compares to its industry. Click to see more on 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. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Ituran Location and Control.
Ituran Location and Control'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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Ituran Location and Control has total assets of US$382m and current liabilities of US$108m. Therefore its current liabilities are equivalent to approximately 28% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.
Our Take On Ituran Location and Control's ROCE
Low current liabilities and high ROCE is a good combination, making Ituran Location and Control look quite interesting. Ituran Location and Control 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 like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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 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. Thank you for reading.