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Why GP Strategies Corporation’s (NYSE:GPX) Use Of Investor Capital Doesn’t Look Great

Simply Wall St

Today we'll evaluate GP Strategies Corporation (NYSE:GPX) to determine whether it could have potential as an investment idea. 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.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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 GP Strategies:

0.053 = US$18m ÷ (US$461m - US$120m) (Based on the trailing twelve months to March 2019.)

So, GP Strategies has an ROCE of 5.3%.

Check out our latest analysis for GP Strategies

Is GP Strategies's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, GP Strategies's ROCE appears to be significantly below the 12% average in the Professional Services industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how GP Strategies stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.

GP Strategies's current ROCE of 5.3% is lower than 3 years ago, when the company reported a 19% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how GP Strategies's past growth compares to other companies.

NYSE:GPX Past Revenue and Net Income, July 22nd 2019

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 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 GP Strategies'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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

GP Strategies has total liabilities of US$120m and total assets of US$461m. Therefore its current liabilities are equivalent to approximately 26% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.

What We Can Learn From GP Strategies's ROCE

While that is good to see, GP Strategies has a low ROCE and does not look attractive in this analysis. Of course, you might also be able to find a better stock than GP Strategies. So you may wish to see this free collection of other companies that have grown earnings strongly.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.