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Why We’re Not Impressed By Whirlpool Corporation’s (NYSE:WHR) 13% ROCE

Daisy Mock

Today we are going to look at Whirlpool Corporation (NYSE:WHR) 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 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.

Return On Capital Employed (ROCE): What is it?

ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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’.

How Do You Calculate Return On Capital Employed?

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 Whirlpool:

0.13 = US$1.4b ÷ (US$19b – US$9.7b) (Based on the trailing twelve months to September 2018.)

Therefore, Whirlpool has an ROCE of 13%.

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Does Whirlpool Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, we find that Whirlpool’s ROCE is meaningfully better than the 11% average in the Consumer Durables industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Whirlpool’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.


NYSE:WHR Last Perf January 23rd 19

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Do Whirlpool’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. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Whirlpool has total liabilities of US$9.7b and total assets of US$19b. Therefore its current liabilities are equivalent to approximately 51% of its total assets. Whirlpool’s current liabilities are fairly high, which increases its ROCE significantly.

The Bottom Line On Whirlpool’s ROCE

The ROCE would not look as appealing if the company had fewer current liabilities. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

I will like Whirlpool better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.