Why Goodfellow Inc.’s (TSE:GDL) Use Of Investor Capital Doesn’t Look Great
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Today we are going to look at Goodfellow Inc. (TSE:GDL) 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. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Understanding 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. 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’.
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Goodfellow:
0.057 = CA$6.7m ÷ (CA$191m – CA$73m) (Based on the trailing twelve months to November 2018.)
So, Goodfellow has an ROCE of 5.7%.
Check out our latest analysis for Goodfellow
Does Goodfellow Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Goodfellow’s ROCE appears meaningfully below the 17% average reported by the Trade Distributors industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Aside from the industry comparison, Goodfellow’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
Goodfellow’s current ROCE of 5.7% is lower than 3 years ago, when the company reported a 11% ROCE. So investors might consider if it has had issues recently.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. If Goodfellow is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Goodfellow’s Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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.
Goodfellow has total assets of CA$191m and current liabilities of CA$73m. As a result, its current liabilities are equal to approximately 38% of its total assets. Goodfellow’s ROCE is improved somewhat by its moderate amount of current liabilities.
Our Take On Goodfellow’s ROCE
Unfortunately, its ROCE is still uninspiring, and there are potentially more attractive prospects out there. Of course you might be able to find a better stock than Goodfellow. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Goodfellow better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
