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What Can We Learn From Willis Lease Finance Corporation’s (NASDAQ:WLFC) Investment Returns?

Simply Wall St

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Today we'll look at Willis Lease Finance Corporation (NASDAQ:WLFC) 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. Next, we'll compare it to others in its industry. 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 is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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 Willis Lease Finance:

0.071 = US$127m ÷ (US$1.9b - US$137m) (Based on the trailing twelve months to December 2018.)

So, Willis Lease Finance has an ROCE of 7.1%.

See our latest analysis for Willis Lease Finance

Does Willis Lease Finance Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Willis Lease Finance's ROCE appears to be around the 8.1% average of the Trade Distributors industry. Setting aside the industry comparison for now, Willis Lease Finance's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

As we can see, Willis Lease Finance currently has an ROCE of 7.1% compared to its ROCE 3 years ago, which was 4.6%. This makes us wonder if the company is improving.

NasdaqGM:WLFC Past Revenue and Net Income, April 8th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. If Willis Lease Finance is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

How Willis Lease Finance's Current Liabilities Impact 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Willis Lease Finance has total assets of US$1.9b and current liabilities of US$137m. As a result, its current liabilities are equal to approximately 7.1% of its total assets. Willis Lease Finance has a low level of current liabilities, which have a minimal impact on its uninspiring ROCE.

The Bottom Line On Willis Lease Finance's ROCE

Based on this information, Willis Lease Finance appears to be a mediocre business. You might be able to find a better buy than Willis Lease Finance. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

I will like Willis Lease Finance 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 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.