Today we are going to look at DuPont de Nemours, Inc. (NYSE:DD) 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.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared 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 is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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'.
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 DuPont de Nemours:
0.16 = US$10b ÷ (US$70b - US$6.6b) (Based on the trailing twelve months to September 2019.)
So, DuPont de Nemours has an ROCE of 16%.
Does DuPont de Nemours Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. DuPont de Nemours's ROCE appears to be substantially greater than the 10% average in the Chemicals industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how DuPont de Nemours compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
We can see that, DuPont de Nemours currently has an ROCE of 16% compared to its ROCE 3 years ago, which was 9.2%. This makes us think the business might be improving. The image below shows how DuPont de Nemours's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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 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 DuPont de Nemours.
Do DuPont de Nemours's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
DuPont de Nemours has total liabilities of US$6.6b and total assets of US$70b. Therefore its current liabilities are equivalent to approximately 9.4% of its total assets. With low current liabilities, DuPont de Nemours's decent ROCE looks that much more respectable.
The Bottom Line On DuPont de Nemours's ROCE
If DuPont de Nemours can continue reinvesting in its business, it could be an attractive prospect. There might be better investments than DuPont de Nemours out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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