Today we are going to look at Echo Global Logistics, Inc. (NASDAQ:ECHO) 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. 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 measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
How Do You Calculate Return On Capital Employed?
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 Echo Global Logistics:
0.075 = US$44m ÷ (US$847m - US$255m) (Based on the trailing twelve months to September 2019.)
So, Echo Global Logistics has an ROCE of 7.5%.
Does Echo Global Logistics Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Echo Global Logistics's ROCE is meaningfully below the Logistics industry average of 13%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how Echo Global Logistics stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
Our data shows that Echo Global Logistics currently has an ROCE of 7.5%, compared to its ROCE of 3.8% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Echo Global Logistics's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the 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 Echo Global Logistics.
Do Echo Global Logistics's Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Echo Global Logistics has total assets of US$847m and current liabilities of US$255m. Therefore its current liabilities are equivalent to approximately 30% of its total assets. Echo Global Logistics's middling level of current liabilities have the effect of boosting its ROCE a bit.
What We Can Learn From Echo Global Logistics's ROCE
Unfortunately, its ROCE is still uninspiring, and there are potentially more attractive prospects out there. You might be able to find a better investment than Echo Global Logistics. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
I will like Echo Global Logistics 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 email@example.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.