Today we'll look at Houston Wire & Cable Company (NASDAQ:HWCC) 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. 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. 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 Houston Wire & Cable:
0.081 = US$14m ÷ (US$203m - US$30m) (Based on the trailing twelve months to December 2018.)
So, Houston Wire & Cable has an ROCE of 8.1%.
Does Houston Wire & Cable Have A Good ROCE?
One way to assess ROCE is to compare similar companies. It appears that Houston Wire & Cable's ROCE is fairly close to the Trade Distributors industry average of 8.1%. Separate from how Houston Wire & Cable stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
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 only a point-in-time measure. If Houston Wire & Cable is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Houston Wire & Cable'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 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Houston Wire & Cable has total liabilities of US$30m and total assets of US$203m. As a result, its current liabilities are equal to approximately 15% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
Our Take On Houston Wire & Cable's ROCE
That said, Houston Wire & Cable's ROCE is mediocre, there may be more attractive investments around. Of course, you might also be able to find a better stock than Houston Wire & Cable. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Houston Wire & Cable better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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 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.