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Are Sirius XM Holdings Inc.’s (NASDAQ:SIRI) High Returns Really That Great?

Simply Wall St

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Today we are going to look at Sirius XM Holdings Inc. (NASDAQ:SIRI) 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding 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. 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.'

How Do You Calculate Return On Capital Employed?

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 Sirius XM Holdings:

0.23 = US$1.8b ÷ (US$11b - US$3.2b) (Based on the trailing twelve months to March 2019.)

So, Sirius XM Holdings has an ROCE of 23%.

View our latest analysis for Sirius XM Holdings

Is Sirius XM Holdings's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Sirius XM Holdings's ROCE is meaningfully better than the 9.1% average in the Media industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Setting aside the comparison to its industry for a moment, Sirius XM Holdings's ROCE in absolute terms currently looks quite high.

NasdaqGS:SIRI Past Revenue and Net Income, May 2nd 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Sirius XM Holdings.

Do Sirius XM 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.

Sirius XM Holdings has total liabilities of US$3.2b and total assets of US$11b. Therefore its current liabilities are equivalent to approximately 29% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.

What We Can Learn From Sirius XM Holdings's ROCE

Low current liabilities and high ROCE is a good combination, making Sirius XM Holdings look quite interesting. There might be better investments than Sirius XM Holdings out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

I will like Sirius XM Holdings better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.