Today we are going to look at RELX PLC (LON:REL) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to 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. 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.
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 RELX:
0.21 = UK£2.0b ÷ (UK£14b - UK£4.7b) (Based on the trailing twelve months to June 2019.)
So, RELX has an ROCE of 21%.
Is RELX's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see RELX's ROCE is around the 19% average reported by the Professional Services industry. Regardless of the industry comparison, in absolute terms, RELX's ROCE currently appears to be excellent.
You can click on the image below to see (in greater detail) how RELX's past growth compares to other companies.
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. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for RELX.
Do RELX's Current Liabilities Skew 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.
RELX has total assets of UK£14b and current liabilities of UK£4.7b. As a result, its current liabilities are equal to approximately 33% of its total assets. RELX has a medium level of current liabilities, boosting its ROCE somewhat.
Our Take On RELX's ROCE
Still, it has a high ROCE, and may be an interesting prospect for further research. There might be better investments than RELX 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.
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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.