Today we’ll evaluate Heartland Express, Inc. (NASDAQ:HTLD) 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, we’ll go over how we calculate ROCE. 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 amount of pre-tax profits a company can generate from the capital employed 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. 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 Heartland Express:
0.087 = US$65m ÷ (US$806m – US$65m) (Based on the trailing twelve months to December 2018.)
So, Heartland Express has an ROCE of 8.7%.
Does Heartland Express Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Heartland Express’s ROCE appears meaningfully below the 12% average reported by the Transportation industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Setting aside the industry comparison for now, Heartland Express’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
Heartland Express’s current ROCE of 8.7% is lower than 3 years ago, when the company reported a 12% ROCE. So investors might consider if it has had issues recently.
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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Heartland Express.
Heartland Express’s Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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.
Heartland Express has total assets of US$806m and current liabilities of US$65m. As a result, its current liabilities are equal to approximately 8.0% of its total assets. Heartland Express has a low level of current liabilities, which have a minimal impact on its uninspiring ROCE.
What We Can Learn From Heartland Express’s ROCE
Heartland Express looks like an ok business, but on this analysis it is not at the top of our buy list. Of course you might be able to find a better stock than Heartland Express. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Heartland Express better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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 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. Thank you for reading.