Why CAI International, Inc.’s (NYSE:CAI) Use Of Investor Capital Doesn’t Look Great
Today we'll evaluate CAI International, Inc. (NYSE:CAI) 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, 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 measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 CAI International:
0.052 = US$135m ÷ (US$2.9b - US$287m) (Based on the trailing twelve months to December 2019.)
Therefore, CAI International has an ROCE of 5.2%.
View our latest analysis for CAI International
Does CAI International Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, CAI International's ROCE appears meaningfully below the 9.3% average reported by the Trade Distributors industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Setting aside the industry comparison for now, CAI International'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.
In our analysis, CAI International's ROCE appears to be 5.2%, compared to 3 years ago, when its ROCE was 2.9%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how CAI International's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for CAI International.
Do CAI International's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
CAI International has current liabilities of US$287m and total assets of US$2.9b. Therefore its current liabilities are equivalent to approximately 9.9% of its total assets. With low levels of current liabilities, at least CAI International's mediocre ROCE is not unduly boosted.
The Bottom Line On CAI International's ROCE
Based on this information, CAI International 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 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.
