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Today we are going to look at DHT Holdings, Inc. (NYSE:DHT) 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, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect 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. Overall, it is a valuable metric that has its flaws. 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?
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 DHT Holdings:
0.051 = US$86m ÷ (US$1.8b - US$129m) (Based on the trailing twelve months to September 2019.)
So, DHT Holdings has an ROCE of 5.1%.
Does DHT Holdings Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, DHT Holdings's ROCE appears to be significantly below the 8.9% average in the Oil and Gas industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how DHT Holdings stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
DHT Holdings's current ROCE of 5.1% is lower than 3 years ago, when the company reported a 11% ROCE. So investors might consider if it has had issues recently. You can see in the image below how DHT Holdings's ROCE compares to its industry. Click to see more on past growth.
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. ROCE is only a point-in-time measure. Given the industry it operates in, DHT Holdings could be considered cyclical. Since the future is so important for investors, you should check out our free report on analyst forecasts for DHT Holdings.
What Are Current Liabilities, And How Do They Affect DHT Holdings's ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.
DHT Holdings has total assets of US$1.8b and current liabilities of US$129m. Therefore its current liabilities are equivalent to approximately 7.1% of its total assets. DHT Holdings has a low level of current liabilities, which have a minimal impact on its uninspiring ROCE.
The Bottom Line On DHT Holdings's ROCE
If performance improves, then DHT Holdings may be an OK investment, especially at the right valuation. 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 DHT Holdings better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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