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Why You Should Care About Boyd Gaming Corporation’s (NYSE:BYD) Low Return On Capital

Simply Wall St

Today we'll look at Boyd Gaming Corporation (NYSE:BYD) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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?

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 Boyd Gaming:

0.066 = US$409m ÷ (US$6.7b - US$531m) (Based on the trailing twelve months to June 2019.)

So, Boyd Gaming has an ROCE of 6.6%.

See our latest analysis for Boyd Gaming

Does Boyd Gaming Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. We can see Boyd Gaming's ROCE is meaningfully below the Hospitality industry average of 8.6%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how Boyd Gaming stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.

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

NYSE:BYD Past Revenue and Net Income, October 12th 2019

When considering this metric, keep in mind that it is backwards looking, and 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 Boyd Gaming.

How Boyd Gaming's Current Liabilities Impact 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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Boyd Gaming has total assets of US$6.7b and current liabilities of US$531m. As a result, its current liabilities are equal to approximately 7.9% of its total assets. Boyd Gaming reports few current liabilities, which have a negligible impact on its unremarkable ROCE.

The Bottom Line On Boyd Gaming's ROCE

Boyd Gaming looks like an ok business, but on this analysis it is not at the top of our buy list. 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.

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

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.