Today we are going to look at CoreLogic, Inc. (NYSE:CLGX) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting 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. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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'.
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 CoreLogic:
0.057 = US$198m ÷ (US$4.1b - US$660m) (Based on the trailing twelve months to September 2019.)
Therefore, CoreLogic has an ROCE of 5.7%.
Is CoreLogic's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see CoreLogic's ROCE is meaningfully below the IT industry average of 10%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how CoreLogic compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.7% available in government bonds. There are potentially more appealing investments elsewhere.
CoreLogic's current ROCE of 5.7% is lower than 3 years ago, when the company reported a 7.8% ROCE. Therefore we wonder if the company is facing new headwinds. The image below shows how CoreLogic's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
CoreLogic's Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
CoreLogic has total assets of US$4.1b and current liabilities of US$660m. As a result, its current liabilities are equal to approximately 16% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.
Our Take On CoreLogic's ROCE
That's not a bad thing, however CoreLogic has a weak ROCE and may not be an attractive investment. Of course, you might also be able to find a better stock than CoreLogic. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like CoreLogic better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.