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Today we'll evaluate Lincoln Educational Services Corporation (NASDAQ:LINC) to determine whether it could have potential as an investment idea. 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 up, we'll look at what ROCE is and how we calculate it. 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.
Understanding Return On Capital Employed (ROCE)
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. In brief, it is a useful tool, but it is not without drawbacks. 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 Lincoln Educational Services:
0.034 = US$4.7m ÷ (US$195m - US$57m) (Based on the trailing twelve months to December 2019.)
Therefore, Lincoln Educational Services has an ROCE of 3.4%.
Does Lincoln Educational Services Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Lincoln Educational Services's ROCE appears to be significantly below the 8.1% average in the Consumer Services industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Lincoln Educational Services stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
Lincoln Educational Services delivered an ROCE of 3.4%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability. The image below shows how Lincoln Educational Services's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the 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 Lincoln Educational Services.
Lincoln Educational Services'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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Lincoln Educational Services has current liabilities of US$57m and total assets of US$195m. Therefore its current liabilities are equivalent to approximately 29% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.
The Bottom Line On Lincoln Educational Services's ROCE
While that is good to see, Lincoln Educational Services has a low ROCE and does not look attractive in this analysis. Of course, you might also be able to find a better stock than Lincoln Educational Services. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Lincoln Educational Services better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
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