Today we are going to look at Hyster-Yale Materials Handling, Inc. (NYSE:HY) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding 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?
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 Hyster-Yale Materials Handling:
0.033 = US$35m ÷ (US$1.9b - US$888m) (Based on the trailing twelve months to June 2019.)
Therefore, Hyster-Yale Materials Handling has an ROCE of 3.3%.
Is Hyster-Yale Materials Handling's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Hyster-Yale Materials Handling's ROCE appears to be significantly below the 12% average in the Machinery industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how Hyster-Yale Materials Handling 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.
Hyster-Yale Materials Handling's current ROCE of 3.3% is lower than its ROCE in the past, which was 12%, 3 years ago. So investors might consider if it has had issues recently. The image below shows how Hyster-Yale Materials Handling's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and 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. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Hyster-Yale Materials Handling.
What Are Current Liabilities, And How Do They Affect Hyster-Yale Materials Handling's 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 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Hyster-Yale Materials Handling has total liabilities of US$888m and total assets of US$1.9b. Therefore its current liabilities are equivalent to approximately 46% of its total assets. With a medium level of current liabilities boosting the ROCE a little, Hyster-Yale Materials Handling's low ROCE is unappealing.
The Bottom Line On Hyster-Yale Materials Handling's ROCE
There are likely better investments out there. You might be able to find a better investment than Hyster-Yale Materials Handling. 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).
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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 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.