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Today we'll evaluate Golden Ocean Group Limited (NASDAQ:GOGL) 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, we'll go over how we calculate ROCE. 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.
Return On Capital Employed (ROCE): What is it?
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. 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?
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 Golden Ocean Group:
0.036 = US$97m ÷ (US$2.9b - US$228m) (Based on the trailing twelve months to September 2019.)
So, Golden Ocean Group has an ROCE of 3.6%.
Is Golden Ocean Group's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Golden Ocean Group's ROCE appears meaningfully below the 4.9% average reported by the Shipping industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Golden Ocean Group'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.
Golden Ocean Group has an ROCE of 3.6%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving. The image below shows how Golden Ocean Group'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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Golden Ocean Group.
What Are Current Liabilities, And How Do They Affect Golden Ocean Group's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
Golden Ocean Group has total assets of US$2.9b and current liabilities of US$228m. As a result, its current liabilities are equal to approximately 7.8% of its total assets. Golden Ocean Group has very few current liabilities, which have a minimal effect on its already low ROCE.
What We Can Learn From Golden Ocean Group's ROCE
Nonetheless, there may be better places to invest your capital. You might be able to find a better investment than Golden Ocean Group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
I will like Golden Ocean Group 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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