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Why We Like Rockwell Automation, Inc.’s (NYSE:ROK) 32% Return On Capital Employed

Ingrid Hart

Today we’ll evaluate Rockwell Automation, Inc. (NYSE:ROK) 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.

Firstly, 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.

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

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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 Rockwell Automation:

0.32 = US$1.3b ÷ (US$6.3b – US$2.2b) (Based on the trailing twelve months to September 2018.)

So, Rockwell Automation has an ROCE of 32%.

Check out our latest analysis for Rockwell Automation

Does Rockwell Automation Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Rockwell Automation’s ROCE appears to be substantially greater than the 11% average in the Electrical industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, Rockwell Automation’s ROCE is currently very good.

Our data shows that Rockwell Automation currently has an ROCE of 32%, compared to its ROCE of 23% 3 years ago. This makes us wonder if the company is improving.

NYSE:ROK Last Perf January 24th 19

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Rockwell Automation.

What Are Current Liabilities, And How Do They Affect Rockwell Automation’s ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Rockwell Automation has total assets of US$6.3b and current liabilities of US$2.2b. As a result, its current liabilities are equal to approximately 36% of its total assets. A medium level of current liabilities boosts Rockwell Automation’s ROCE somewhat.

The Bottom Line On Rockwell Automation’s ROCE

Even so, it has a great ROCE, and could be an attractive prospect for further research. But note: Rockwell Automation may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.