Why We Like Great Lakes Dredge & Dock Corporation’s (NASDAQ:GLDD) 16% Return On Capital Employed
Today we are going to look at Great Lakes Dredge & Dock Corporation (NASDAQ:GLDD) 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting 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. 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 Great Lakes Dredge & Dock:
0.16 = US$107m ÷ (US$869m - US$203m) (Based on the trailing twelve months to June 2019.)
Therefore, Great Lakes Dredge & Dock has an ROCE of 16%.
Check out our latest analysis for Great Lakes Dredge & Dock
Is Great Lakes Dredge & Dock's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Great Lakes Dredge & Dock's ROCE appears to be substantially greater than the 9.7% 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 Great Lakes Dredge & Dock compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
In our analysis, Great Lakes Dredge & Dock's ROCE appears to be 16%, compared to 3 years ago, when its ROCE was 3.0%. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Great Lakes Dredge & Dock's past growth compares to other companies.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Great Lakes Dredge & Dock.
How Great Lakes Dredge & Dock'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. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Great Lakes Dredge & Dock has total assets of US$869m and current liabilities of US$203m. Therefore its current liabilities are equivalent to approximately 23% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
The Bottom Line On Great Lakes Dredge & Dock's ROCE
Overall, Great Lakes Dredge & Dock has a decent ROCE and could be worthy of further research. There might be better investments than Great Lakes Dredge & Dock 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.
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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.
