Today we are going to look at AMERCO (NASDAQ:UHAL) 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. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting 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. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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?
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 AMERCO:
0.051 = US$621m ÷ (US$13b - US$793m) (Based on the trailing twelve months to September 2019.)
Therefore, AMERCO has an ROCE of 5.1%.
Does AMERCO Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, AMERCO's ROCE appears to be significantly below the 11% average in the Transportation industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how AMERCO stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
AMERCO's current ROCE of 5.1% is lower than 3 years ago, when the company reported a 9.5% ROCE. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how AMERCO'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. 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 AMERCO.
How AMERCO's Current Liabilities Impact 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. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
AMERCO has total liabilities of US$793m and total assets of US$13b. As a result, its current liabilities are equal to approximately 6.2% of its total assets. AMERCO reports few current liabilities, which have a negligible impact on its unremarkable ROCE.
What We Can Learn From AMERCO's ROCE
Based on this information, AMERCO appears to be a mediocre business. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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.
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