Today we'll look at Leggett & Platt, Incorporated (NYSE:LEG) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting 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. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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 Leggett & Platt:
0.12 = US$479m ÷ (US$4.9b - US$921m) (Based on the trailing twelve months to September 2019.)
So, Leggett & Platt has an ROCE of 12%.
Is Leggett & Platt's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Leggett & Platt's ROCE appears to be around the 11% average of the Consumer Durables industry. Separate from Leggett & Platt's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that, Leggett & Platt currently has an ROCE of 12%, less than the 21% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Leggett & Platt'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. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Leggett & Platt's Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Leggett & Platt has total assets of US$4.9b and current liabilities of US$921m. Therefore its current liabilities are equivalent to approximately 19% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
Our Take On Leggett & Platt's ROCE
This is good to see, and with a sound ROCE, Leggett & Platt could be worth a closer look. There might be better investments than Leggett & Platt 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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