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Is Parsons Corporation (NYSE:PSN) Investing Your Capital Efficiently?

Simply Wall St

Today we are going to look at Parsons Corporation (NYSE:PSN) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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.

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 Parsons:

0.029 = US$67m ÷ (US$3.5b - US$1.2b) (Based on the trailing twelve months to March 2020.)

So, Parsons has an ROCE of 2.9%.

View our latest analysis for Parsons

Does Parsons Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Parsons's ROCE appears to be significantly below the 9.7% average in the Aerospace & Defense industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how Parsons compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.2% available in government bonds. It is likely that there are more attractive prospects out there.

The image below shows how Parsons's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NYSE:PSN Past Revenue and Net Income May 21st 2020
NYSE:PSN Past Revenue and Net Income May 21st 2020

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

Do Parsons's Current Liabilities Skew 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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Parsons has total assets of US$3.5b and current liabilities of US$1.2b. Therefore its current liabilities are equivalent to approximately 33% of its total assets. Parsons has a medium level of current liabilities (boosting the ROCE somewhat), and a low ROCE.

The Bottom Line On Parsons's ROCE

There are likely better investments out there. 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).

Parsons is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.

Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email 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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.