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Do You Know About Performance Food Group Company’s (NYSE:PFGC) ROCE?

Today we’ll look at Performance Food Group Company (NYSE:PFGC) 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, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. 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’.

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 Performance Food Group:

0.10 = US$278m ÷ (US$4.2b – US$1.5b) (Based on the trailing twelve months to December 2018.)

So, Performance Food Group has an ROCE of 10%.

View our latest analysis for Performance Food Group

Does Performance Food Group Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Performance Food Group’s ROCE is around the 10% average reported by the Consumer Retailing industry. Separate from how Performance Food Group stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.

Our data shows that Performance Food Group currently has an ROCE of 10%, compared to its ROCE of 8.1% 3 years ago. This makes us think the business might be improving.

NYSE:PFGC Past Revenue and Net Income, March 9th 2019
NYSE:PFGC Past Revenue and Net Income, March 9th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Performance Food Group.

How Performance Food Group’s Current Liabilities Impact Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.

Performance Food Group has total assets of US$4.2b and current liabilities of US$1.5b. As a result, its current liabilities are equal to approximately 35% of its total assets. Performance Food Group’s ROCE is improved somewhat by its moderate amount of current liabilities.

Our Take On Performance Food Group’s ROCE

With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. But note: Performance Food Group may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.

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