Today we'll look at US Foods Holding Corp. (NYSE:USFD) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. In general, businesses with a higher ROCE are usually better quality. 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.'
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 US Foods Holding:
0.098 = US$701m ÷ (US$9.3b - US$2.2b) (Based on the trailing twelve months to June 2019.)
So, US Foods Holding has an ROCE of 9.8%.
Is US Foods Holding's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, US Foods Holding's ROCE appears to be around the 9.8% average of the Consumer Retailing industry. Setting aside the industry comparison for now, US Foods Holding's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
We can see that , US Foods Holding currently has an ROCE of 9.8% compared to its ROCE 3 years ago, which was 6.7%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how US Foods Holding's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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, 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 US Foods Holding.
Do US Foods Holding's Current Liabilities Skew Its ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
US Foods Holding has total assets of US$9.3b and current liabilities of US$2.2b. As a result, its current liabilities are equal to approximately 24% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
What We Can Learn From US Foods Holding's ROCE
That said, US Foods Holding's ROCE is mediocre, there may be more attractive investments around. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
I will like US Foods Holding better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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If you spot an error that warrants correction, please contact the editor at email@example.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.