Today we'll evaluate Aerojet Rocketdyne Holdings, Inc. (NYSE:AJRD) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting 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. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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'.
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 Aerojet Rocketdyne Holdings:
0.12 = US$213m ÷ (US$2.7b - US$870m) (Based on the trailing twelve months to December 2019.)
Therefore, Aerojet Rocketdyne Holdings has an ROCE of 12%.
Is Aerojet Rocketdyne Holdings's ROCE Good?
One way to assess ROCE is to compare similar companies. We can see Aerojet Rocketdyne Holdings's ROCE is around the 11% average reported by the Aerospace & Defense industry. Separate from Aerojet Rocketdyne Holdings's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Our data shows that Aerojet Rocketdyne Holdings currently has an ROCE of 12%, compared to its ROCE of 5.8% 3 years ago. This makes us wonder if the company is improving. The image below shows how Aerojet Rocketdyne Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Aerojet Rocketdyne Holdings's Current Liabilities And Their Impact On Its 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Aerojet Rocketdyne Holdings has total assets of US$2.7b and current liabilities of US$870m. As a result, its current liabilities are equal to approximately 32% of its total assets. With this level of current liabilities, Aerojet Rocketdyne Holdings's ROCE is boosted somewhat.
Our Take On Aerojet Rocketdyne Holdings's ROCE
With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. There might be better investments than Aerojet Rocketdyne 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.
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.
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