Today we'll look at Charter Communications, Inc. (NASDAQ:CHTR) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
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 Charter Communications:
0.044 = US$5.9b ÷ (US$147b - US$12b) (Based on the trailing twelve months to March 2019.)
So, Charter Communications has an ROCE of 4.4%.
Is Charter Communications's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Charter Communications's ROCE is meaningfully below the Media industry average of 8.5%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Charter Communications 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.
We can see that , Charter Communications currently has an ROCE of 4.4% compared to its ROCE 3 years ago, which was 3.4%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Charter Communications's ROCE compares to its industry. Click to see more on past growth.
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 Charter Communications.
Charter Communications's Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Charter Communications has total assets of US$147b and current liabilities of US$12b. Therefore its current liabilities are equivalent to approximately 8.1% of its total assets. Charter Communications has a low level of current liabilities, which have a negligible impact on its already low ROCE.
The Bottom Line On Charter Communications's ROCE
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.