Today we are going to look at Liberty TripAdvisor Holdings, Inc. (NASDAQ:LTRP.A) to see whether it might be an attractive investment prospect. 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. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
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?
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 Liberty TripAdvisor Holdings:
0.033 = US$157m ÷ (US$5.6b - US$910m) (Based on the trailing twelve months to June 2019.)
So, Liberty TripAdvisor Holdings has an ROCE of 3.3%.
Does Liberty TripAdvisor Holdings Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, Liberty TripAdvisor Holdings's ROCE appears to be significantly below the 8.7% average in the Interactive Media and Services industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Liberty TripAdvisor Holdings's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.
Our data shows that Liberty TripAdvisor Holdings currently has an ROCE of 3.3%, compared to its ROCE of 0.5% 3 years ago. This makes us think the business might be improving. The image below shows how Liberty TripAdvisor Holdings's ROCE compares to its industry, and you can click it to see more detail on its 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.
Liberty TripAdvisor Holdings's Current Liabilities And Their Impact On 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. 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 TripAdvisor Holdings has total assets of US$5.6b and current liabilities of US$910m. As a result, its current liabilities are equal to approximately 16% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.
The Bottom Line On Liberty TripAdvisor Holdings's ROCE
Liberty TripAdvisor Holdings has a poor ROCE, and there may be better investment prospects out there. Of course, you might also be able to find a better stock than Liberty TripAdvisor Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Liberty TripAdvisor Holdings 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 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.