Today we are going to look at SPX FLOW, Inc. (NYSE:FLOW) to see whether it might be an attractive investment prospect. 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.
Firstly, we'll go over how we 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.
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. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
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 SPX FLOW:
0.11 = US$195m ÷ (US$2.5b - US$677m) (Based on the trailing twelve months to September 2019.)
So, SPX FLOW has an ROCE of 11%.
Does SPX FLOW Have A Good ROCE?
One way to assess ROCE is to compare similar companies. It appears that SPX FLOW's ROCE is fairly close to the Machinery industry average of 11%. Independently of how SPX FLOW compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
We can see that, SPX FLOW currently has an ROCE of 11% compared to its ROCE 3 years ago, which was 7.4%. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how SPX FLOW's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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 only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for SPX FLOW.
SPX FLOW's Current Liabilities And Their Impact On 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.
SPX FLOW has total assets of US$2.5b and current liabilities of US$677m. As a result, its current liabilities are equal to approximately 27% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
What We Can Learn From SPX FLOW's ROCE
With that in mind, SPX FLOW's ROCE appears pretty good. There might be better investments than SPX FLOW 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
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. Thank you for reading.