Are U.S. Concrete, Inc.’s Returns On Capital Worth Investigating?
Today we’ll look at U.S. Concrete, Inc. (NASDAQ:USCR) and reflect on its potential as an investment. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
Firstly, 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.
What is Return On Capital Employed (ROCE)?
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. 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 U.S. Concrete:
0.068 = US$100m ÷ (US$1.4b – US$282m) (Based on the trailing twelve months to September 2018.)
So, U.S. Concrete has an ROCE of 6.8%.
See our latest analysis for U.S. Concrete
Is U.S. Concrete’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, U.S. Concrete’s ROCE appears to be around the 8.5% average of the Basic Materials industry. Setting aside the industry comparison for now, U.S. Concrete’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
U.S. Concrete’s current ROCE of 6.8% is lower than 3 years ago, when the company reported a 15% ROCE. This makes us wonder if the business is facing new challenges.
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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for U.S. Concrete.
U.S. Concrete’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.
U.S. Concrete has total liabilities of US$282m and total assets of US$1.4b. As a result, its current liabilities are equal to approximately 20% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.
What We Can Learn From U.S. Concrete’s ROCE
If U.S. Concrete continues to earn an uninspiring ROCE, there may be better places to invest. Of course you might be able to find a better stock than U.S. Concrete. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like U.S. Concrete 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.
