Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Today we'll evaluate United Continental Holdings, Inc. (NASDAQ:UAL) 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed 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 United Continental Holdings:
0.11 = US$4.0b ÷ (US$51b - US$15b) (Based on the trailing twelve months to March 2019.)
Therefore, United Continental Holdings has an ROCE of 11%.
Does United Continental Holdings Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, United Continental Holdings's ROCE appears to be around the 11% average of the Airlines industry. Independently of how United Continental Holdings compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
As we can see, United Continental Holdings currently has an ROCE of 11%, less than the 20% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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 United Continental Holdings.
United Continental Holdings's Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.
United Continental Holdings has total liabilities of US$15b and total assets of US$51b. As a result, its current liabilities are equal to approximately 30% of its total assets. United Continental Holdings has a middling amount of current liabilities, increasing its ROCE somewhat.
What We Can Learn From United Continental Holdings's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. United Continental Holdings shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
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 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. Thank you for reading.