Today we are going to look at Scorpio Bulkers Inc. (NYSE:SALT) 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. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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 Scorpio Bulkers:
0.01 = US$16m ÷ (US$1.7b - US$121m) (Based on the trailing twelve months to December 2019.)
So, Scorpio Bulkers has an ROCE of 1.0%.
Does Scorpio Bulkers Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Scorpio Bulkers's ROCE appears to be significantly below the 4.8% average in the Shipping industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Scorpio Bulkers compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.7% available in government bonds. Readers may wish to look for more rewarding investments.
Scorpio Bulkers has an ROCE of 1.0%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That suggests the business has returned to profitability. The image below shows how Scorpio Bulkers's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Scorpio Bulkers.
How Scorpio Bulkers's Current Liabilities Impact 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. 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.
Scorpio Bulkers has total assets of US$1.7b and current liabilities of US$121m. Therefore its current liabilities are equivalent to approximately 7.3% of its total assets. Scorpio Bulkers has very few current liabilities, which have a minimal effect on its already low ROCE.
What We Can Learn From Scorpio Bulkers's ROCE
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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.