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Why We’re Not Impressed By Patriot Transportation Holding, Inc.’s (NASDAQ:PATI) 0.4% ROCE

Simply Wall St

Today we'll look at Patriot Transportation Holding, Inc. (NASDAQ:PATI) 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. And finally, we'll look at how its current liabilities are impacting 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. 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.'

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 Patriot Transportation Holding:

0.0043 = US$267k ÷ (US$72m - US$9.8m) (Based on the trailing twelve months to June 2019.)

So, Patriot Transportation Holding has an ROCE of 0.4%.

See our latest analysis for Patriot Transportation Holding

Does Patriot Transportation Holding Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Patriot Transportation Holding's ROCE is meaningfully below the Transportation industry average of 11%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Patriot Transportation Holding's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.

Patriot Transportation Holding's current ROCE of 0.4% is lower than its ROCE in the past, which was 12%, 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Patriot Transportation Holding's ROCE compares to its industry. Click to see more on past growth.

NasdaqGS:PATI Past Revenue and Net Income, September 2nd 2019

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, after all, simply a snap shot of a single year. How cyclical is Patriot Transportation Holding? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Patriot Transportation Holding's Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

Patriot Transportation Holding has total liabilities of US$9.8m and total assets of US$72m. As a result, its current liabilities are equal to approximately 14% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.

The Bottom Line On Patriot Transportation Holding's ROCE

Patriot Transportation Holding has a poor ROCE, and there may be better investment prospects out there. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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 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. Thank you for reading.