Today we'll evaluate Systemax Inc. (NYSE:SYX) to determine whether it could have potential as an investment idea. 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. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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 Systemax:
0.29 = US$65m ÷ (US$390m - US$168m) (Based on the trailing twelve months to June 2019.)
Therefore, Systemax has an ROCE of 29%.
Is Systemax's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, we find that Systemax's ROCE is meaningfully better than the 9.0% average in the Trade Distributors industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, Systemax's ROCE in absolute terms currently looks quite high.
We can see that, Systemax currently has an ROCE of 29% compared to its ROCE 3 years ago, which was 6.8%. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Systemax's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. 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 Systemax.
Systemax's Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Systemax has total liabilities of US$168m and total assets of US$390m. Therefore its current liabilities are equivalent to approximately 43% of its total assets. Systemax's ROCE is boosted somewhat by its middling amount of current liabilities.
Our Take On Systemax's ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. There might be better investments than Systemax 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 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.