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Why We Like Lee Enterprises, Incorporated’s (NYSE:LEE) 17% Return On Capital Employed

Simply Wall St

Today we'll look at Lee Enterprises, Incorporated (NYSE:LEE) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the 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 is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. 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'.

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 Lee Enterprises:

0.17 = US$85m ÷ (US$555m - US$61m) (Based on the trailing twelve months to September 2019.)

So, Lee Enterprises has an ROCE of 17%.

View our latest analysis for Lee Enterprises

Is Lee Enterprises's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Lee Enterprises's ROCE is meaningfully higher than the 9.0% average in the Media industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Lee Enterprises compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

The image below shows how Lee Enterprises's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NYSE:LEE Past Revenue and Net Income, January 2nd 2020

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. How cyclical is Lee Enterprises? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

How Lee Enterprises's Current Liabilities Impact 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Lee Enterprises has total assets of US$555m and current liabilities of US$61m. Therefore its current liabilities are equivalent to approximately 11% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

Our Take On Lee Enterprises's ROCE

This is good to see, and with a sound ROCE, Lee Enterprises could be worth a closer look. There might be better investments than Lee Enterprises 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.

I will like Lee Enterprises better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.

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. Thank you for reading.