Today we are going to look at Waste Connections, Inc. (NYSE:WCN) 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 of all, we'll work out how to calculate ROCE. 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.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 Waste Connections:
0.073 = US$891m ÷ (US$13b - US$943m) (Based on the trailing twelve months to June 2019.)
So, Waste Connections has an ROCE of 7.3%.
Does Waste Connections Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Waste Connections's ROCE appears to be significantly below the 11% average in the Commercial Services industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Setting aside the industry comparison for now, Waste Connections's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
We can see that , Waste Connections currently has an ROCE of 7.3% compared to its ROCE 3 years ago, which was 4.3%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Waste Connections's past growth compares to other companies.
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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Waste Connections.
Do Waste Connections's Current Liabilities Skew 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.
Waste Connections has total assets of US$13b and current liabilities of US$943m. Therefore its current liabilities are equivalent to approximately 7.2% of its total assets. Waste Connections reports few current liabilities, which have a negligible impact on its unremarkable ROCE.
What We Can Learn From Waste Connections's ROCE
Waste Connections looks like an ok business, but on this analysis it is not at the top of our buy list. You might be able to find a better investment than Waste Connections. 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).
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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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. Thank you for reading.