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Why We’re Not Keen On Century Communities, Inc.’s (NYSE:CCS) 7.2% Return On Capital

Simply Wall St

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Today we'll look at Century Communities, Inc. (NYSE:CCS) and reflect on its potential as an investment. 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. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from 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. 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 Century Communities:

0.072 = US$151m ÷ (US$2.3b - US$224m) (Based on the trailing twelve months to March 2019.)

Therefore, Century Communities has an ROCE of 7.2%.

Check out our latest analysis for Century Communities

Is Century Communities's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Century Communities's ROCE appears meaningfully below the 11% average reported by the Consumer Durables industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how Century Communities stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.

NYSE:CCS Past Revenue and Net Income, May 13th 2019

When considering this metric, keep in mind that it is backwards looking, and 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 only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

How Century Communities's Current Liabilities Impact 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Century Communities has total assets of US$2.3b and current liabilities of US$224m. As a result, its current liabilities are equal to approximately 9.6% of its total assets. Century Communities reports few current liabilities, which have a negligible impact on its unremarkable ROCE.

Our Take On Century Communities's ROCE

Based on this information, Century Communities appears to be a mediocre business. You might be able to find a better investment than Century Communities. 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 like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.