Why CSW Industrials, Inc.’s (NASDAQ:CSWI) Return On Capital Employed Is Impressive
Today we’ll evaluate CSW Industrials, Inc. (NASDAQ:CSWI) to determine whether it could have potential as an investment idea. 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. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its 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?
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 CSW Industrials:
0.21 = US$56m ÷ (US$317m – US$44m) (Based on the trailing twelve months to December 2018.)
Therefore, CSW Industrials has an ROCE of 21%.
View our latest analysis for CSW Industrials
Does CSW Industrials Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that CSW Industrials’s ROCE is meaningfully better than the 15% average in the Building 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 CSW Industrials sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
As we can see, CSW Industrials currently has an ROCE of 21% compared to its ROCE 3 years ago, which was 14%. This makes us think the business might be improving.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately 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. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for CSW Industrials.
What Are Current Liabilities, And How Do They Affect CSW Industrials’s 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
CSW Industrials has total assets of US$317m and current liabilities of US$44m. As a result, its current liabilities are equal to approximately 14% of its total assets. Low current liabilities are not boosting the ROCE too much.
Our Take On CSW Industrials’s ROCE
This is good to see, and with a sound ROCE, CSW Industrials could be worth a closer look. But note: CSW Industrials 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).
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.
