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Is Whirlpool Corporation's (NYSE:WHR) Capital Allocation Ability Worth Your Time?

Simply Wall St

Today we are going to look at Whirlpool Corporation (NYSE:WHR) to see whether it might be an attractive investment prospect. 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

What is 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. Generally speaking a higher ROCE is better. 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 Whirlpool:

0.12 = US$1.2b ÷ (US$18b - US$8.5b) (Based on the trailing twelve months to September 2019.)

So, Whirlpool has an ROCE of 12%.

View our latest analysis for Whirlpool

Does Whirlpool Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. It appears that Whirlpool's ROCE is fairly close to the Consumer Durables industry average of 11%. Separate from Whirlpool's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

The image below shows how Whirlpool's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NYSE:WHR Past Revenue and Net Income, January 23rd 2020

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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

What Are Current Liabilities, And How Do They Affect Whirlpool's 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Whirlpool has total liabilities of US$8.5b and total assets of US$18b. As a result, its current liabilities are equal to approximately 46% of its total assets. With this level of current liabilities, Whirlpool's ROCE is boosted somewhat.

Our Take On Whirlpool's ROCE

While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Whirlpool 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.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.

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.