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Why International Game Technology PLC’s (NYSE:IGT) Return On Capital Employed Looks Uninspiring

Brandon Murphy

Today we are going to look at International Game Technology PLC (NYSE:IGT) 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 up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE 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. Overall, it is a valuable metric that has its flaws. 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?

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 International Game Technology:

0.07 = US$675m ÷ (US$14b – US$2.3b) (Based on the trailing twelve months to September 2018.)

So, International Game Technology has an ROCE of 7.0%.

See our latest analysis for International Game Technology

Does International Game Technology Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. We can see International Game Technology’s ROCE is meaningfully below the Hospitality industry average of 9.9%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Setting aside the industry comparison for now, International Game Technology’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.

As we can see, International Game Technology currently has an ROCE of 7.0% compared to its ROCE 3 years ago, which was 4.7%. This makes us wonder if the company is improving.

NYSE:IGT Last Perf January 26th 19

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. Since the future is so important for investors, you should check out our free report on analyst forecasts for International Game Technology.

What Are Current Liabilities, And How Do They Affect International Game Technology’s ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

International Game Technology has total assets of US$14b and current liabilities of US$2.3b. As a result, its current liabilities are equal to approximately 17% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

What We Can Learn From International Game Technology’s ROCE

With that in mind, we’re not overly impressed with International Game Technology’s ROCE, so it may not be the most appealing prospect. But note: International Game Technology may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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

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.