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Why We’re Not Keen On The Greenbrier Companies, Inc.’s (NYSE:GBX) 9.2% Return On Capital

Simply Wall St

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Today we'll evaluate The Greenbrier Companies, Inc. (NYSE:GBX) to determine whether it could have potential as an investment idea. 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. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. 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.'

So, How Do We Calculate ROCE?

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 Greenbrier Companies:

0.092 = US$188m ÷ (US$2.5b - US$460m) (Based on the trailing twelve months to November 2018.)

Therefore, Greenbrier Companies has an ROCE of 9.2%.

View our latest analysis for Greenbrier Companies

Is Greenbrier Companies's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Greenbrier Companies's ROCE appears to be significantly below the 12% average in the Machinery industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how Greenbrier Companies 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.

Greenbrier Companies's current ROCE of 9.2% is lower than its ROCE in the past, which was 36%, 3 years ago. So investors might consider if it has had issues recently.

NYSE:GBX Past Revenue and Net Income, April 2nd 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Greenbrier Companies.

What Are Current Liabilities, And How Do They Affect Greenbrier Companies'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. 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.

Greenbrier Companies has total assets of US$2.5b and current liabilities of US$460m. As a result, its current liabilities are equal to approximately 18% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

The Bottom Line On Greenbrier Companies's ROCE

If Greenbrier Companies continues to earn an uninspiring ROCE, there may be better places to invest. You might be able to find a better buy than Greenbrier Companies. 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.

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.