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Why Clarkson PLC’s (LON:CKN) Return On Capital Employed Is Impressive

Simply Wall St

Today we’ll look at Clarkson PLC (LON:CKN) 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. Second, we’ll look at its ROCE compared to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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?

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 Clarkson:

0.093 = UK£46m ÷ (UK£549m – UK£100m) (Based on the trailing twelve months to June 2018.)

Therefore, Clarkson has an ROCE of 9.3%.

Check out our latest analysis for Clarkson

Does Clarkson Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Clarkson’s ROCE appears to be substantially greater than the 5.1% average in the Shipping industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of where Clarkson sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

LSE:CKN Past Revenue and Net Income, March 7th 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. 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 Clarkson.

Clarkson’s Current Liabilities And Their Impact On 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. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Clarkson has total assets of UK£549m and current liabilities of UK£100m. As a result, its current liabilities are equal to approximately 18% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

The Bottom Line On Clarkson’s ROCE

Overall, Clarkson has a decent ROCE and could be worthy of further research. But note: Clarkson may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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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.