Why EMCOR Group, Inc.’s (NYSE:EME) Return On Capital Employed Is Impressive
Today we'll look at EMCOR Group, Inc. (NYSE:EME) 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.
Firstly, we'll go over how we 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.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed 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. 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 EMCOR Group:
0.17 = US$452m ÷ (US$4.5b - US$1.8b) (Based on the trailing twelve months to September 2019.)
So, EMCOR Group has an ROCE of 17%.
View our latest analysis for EMCOR Group
Is EMCOR Group's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that EMCOR Group's ROCE is meaningfully better than the 11% average in the Construction industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how EMCOR Group compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
We can see that, EMCOR Group currently has an ROCE of 17% compared to its ROCE 3 years ago, which was 13%. This makes us wonder if the company is improving. You can see in the image below how EMCOR Group's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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 EMCOR Group.
What Are Current Liabilities, And How Do They Affect EMCOR Group's 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 counter this, investors can check if a company has high current liabilities relative to total assets.
EMCOR Group has total assets of US$4.5b and current liabilities of US$1.8b. Therefore its current liabilities are equivalent to approximately 40% of its total assets. With this level of current liabilities, EMCOR Group's ROCE is boosted somewhat.
The Bottom Line On EMCOR Group's ROCE
With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. There might be better investments than EMCOR Group 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
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