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How Do P. H. Glatfelter Company’s (NYSE:GLT) Returns Compare To Its Industry?

Simply Wall St

Today we are going to look at P. H. Glatfelter Company (NYSE:GLT) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

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.

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. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'

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 P. H. Glatfelter:

0.043 = US$46m ÷ (US$1.3b - US$225m) (Based on the trailing twelve months to June 2019.)

So, P. H. Glatfelter has an ROCE of 4.3%.

See our latest analysis for P. H. Glatfelter

Is P. H. Glatfelter's ROCE Good?

One way to assess ROCE is to compare similar companies. We can see P. H. Glatfelter's ROCE is meaningfully below the Forestry industry average of 11%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how P. H. Glatfelter 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.

P. H. Glatfelter's current ROCE of 4.3% is lower than 3 years ago, when the company reported a 6.2% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how P. H. Glatfelter's past growth compares to other companies.

NYSE:GLT Past Revenue and Net Income, August 15th 2019

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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for P. H. Glatfelter.

P. H. Glatfelter'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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.

P. H. Glatfelter has total assets of US$1.3b and current liabilities of US$225m. Therefore its current liabilities are equivalent to approximately 17% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.

Our Take On P. H. Glatfelter's ROCE

P. H. Glatfelter has a poor ROCE, and there may be better investment prospects out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.

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.