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Why Fortress Transportation and Infrastructure Investors LLC’s (NYSE:FTAI) Return On Capital Employed Looks Uninspiring

Michael Canly

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Today we’ll look at Fortress Transportation and Infrastructure Investors LLC (NYSE:FTAI) 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 up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.

Understanding 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. Generally speaking a higher ROCE is better. 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 Fortress Transportation and Infrastructure Investors:

0.012 = US$6.9m ÷ (US$2.5b – US$320m) (Based on the trailing twelve months to September 2018.)

So, Fortress Transportation and Infrastructure Investors has an ROCE of 1.2%.

See our latest analysis for Fortress Transportation and Infrastructure Investors

Does Fortress Transportation and Infrastructure Investors Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Fortress Transportation and Infrastructure Investors’s ROCE appears meaningfully below the 7.9% average reported by the Trade Distributors industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Fortress Transportation and Infrastructure Investors’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.

As we can see, Fortress Transportation and Infrastructure Investors currently has an ROCE of 1.2% compared to its ROCE 3 years ago, which was 0.2%. This makes us wonder if the company is improving.

NYSE:FTAI Last Perf February 14th 19

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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Do Fortress Transportation and Infrastructure Investors’s Current Liabilities Skew 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 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Fortress Transportation and Infrastructure Investors has total assets of US$2.5b and current liabilities of US$320m. As a result, its current liabilities are equal to approximately 13% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.

What We Can Learn From Fortress Transportation and Infrastructure Investors’s ROCE

While that is good to see, Fortress Transportation and Infrastructure Investors has a low ROCE and does not look attractive in this analysis. You might be able to find a better buy than Fortress Transportation and Infrastructure Investors. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.