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Why Rush Enterprises, Inc.’s (NASDAQ:RUSH.B) Return On Capital Employed Is Impressive

Simply Wall St

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Today we are going to look at Rush Enterprises, Inc. (NASDAQ:RUSH.B) 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 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.

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. All else being equal, a better business will have a higher ROCE. 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?

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 Rush Enterprises:

0.12 = US$217m ÷ (US$3.4b - US$1.7b) (Based on the trailing twelve months to March 2019.)

So, Rush Enterprises has an ROCE of 12%.

View our latest analysis for Rush Enterprises

Is Rush Enterprises's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Rush Enterprises's ROCE appears to be substantially greater than the 8.8% average in the Trade Distributors industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Rush Enterprises compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

We can see that , Rush Enterprises currently has an ROCE of 12% compared to its ROCE 3 years ago, which was 6.7%. This makes us wonder if the company is improving. The image below shows how Rush Enterprises's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NasdaqGS:RUSH.B Past Revenue and Net Income, July 15th 2019

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Do Rush Enterprises's Current Liabilities Skew Its ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Rush Enterprises has total assets of US$3.4b and current liabilities of US$1.7b. As a result, its current liabilities are equal to approximately 48% of its total assets. With this level of current liabilities, Rush Enterprises's ROCE is boosted somewhat.

The Bottom Line On Rush Enterprises's ROCE

Rush Enterprises's ROCE does look good, but the level of current liabilities also contribute to that. There might be better investments than Rush Enterprises out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

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

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.