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Is Qube Holdings Limited (ASX:QUB) Better Than Average At Deploying Capital?

Simply Wall St

Today we'll look at Qube Holdings Limited (ASX:QUB) and reflect on its potential as an investment. 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. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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?

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 Qube Holdings:

0.037 = AU$145m ÷ (AU$4.3b - AU$312m) (Based on the trailing twelve months to December 2018.)

So, Qube Holdings has an ROCE of 3.7%.

See our latest analysis for Qube Holdings

Does Qube Holdings Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. It appears that Qube Holdings's ROCE is fairly close to the Infrastructure industry average of 3.5%. Independently of how Qube Holdings compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.3% available in government bonds. There are potentially more appealing investments elsewhere.

Qube Holdings's current ROCE of 3.7% is lower than its ROCE in the past, which was 7.6%, 3 years ago. This makes us wonder if the business is facing new challenges. You can see in the image below how Qube Holdings's ROCE compares to its industry. Click to see more on past growth.

ASX:QUB Past Revenue and Net Income, August 2nd 2019

When considering this metric, keep in mind that it is backwards looking, and 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, 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 Qube Holdings.

Do Qube Holdings's Current Liabilities Skew Its ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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.

Qube Holdings has total liabilities of AU$312m and total assets of AU$4.3b. Therefore its current liabilities are equivalent to approximately 7.3% of its total assets. Qube Holdings has a low level of current liabilities, which have a negligible impact on its already low ROCE.

Our Take On Qube Holdings's ROCE

Still, investors could probably find more attractive prospects with better performance out there. Of course, you might also be able to find a better stock than Qube Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.