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How Do The Liberty SiriusXM Group’s (NASDAQ:LSXM.K) Returns On Capital Compare To Peers?

Simply Wall St

Today we are going to look at The Liberty SiriusXM Group (NASDAQ:LSXM.K) to see whether it might be an attractive investment prospect. 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.

Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE 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 amount of pre-tax profits a company can generate from the 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'.

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 Liberty SiriusXM Group:

0.059 = US$1.6b ÷ (US$31b - US$3.3b) (Based on the trailing twelve months to September 2019.)

So, Liberty SiriusXM Group has an ROCE of 5.9%.

See our latest analysis for Liberty SiriusXM Group

Is Liberty SiriusXM Group's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Liberty SiriusXM Group's ROCE is meaningfully below the Media industry average of 9.3%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Aside from the industry comparison, Liberty SiriusXM Group'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.

You can click on the image below to see (in greater detail) how Liberty SiriusXM Group's past growth compares to other companies.

NasdaqGS:LSXM.K Past Revenue and Net Income, January 15th 2020

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Liberty SiriusXM Group.

Liberty SiriusXM Group's Current Liabilities And Their Impact On 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 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Liberty SiriusXM Group has total assets of US$31b and current liabilities of US$3.3b. As a result, its current liabilities are equal to approximately 11% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

Our Take On Liberty SiriusXM Group's ROCE

If Liberty SiriusXM Group continues to earn an uninspiring ROCE, there may be better places to invest. But note: make sure you look for a great company, not just the first idea you come across. 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.

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.

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. Thank you for reading.