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Why XPEL, Inc.’s (NASDAQ:XPEL) Return On Capital Employed Is Impressive

Simply Wall St

Today we are going to look at XPEL, Inc. (NASDAQ:XPEL) 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. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting 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. Generally speaking a higher ROCE is better. 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 XPEL:

0.43 = US$12m ÷ (US$39m - US$12m) (Based on the trailing twelve months to March 2019.)

Therefore, XPEL has an ROCE of 43%.

Check out our latest analysis for XPEL

Is XPEL's ROCE Good?

One way to assess ROCE is to compare similar companies. XPEL's ROCE appears to be substantially greater than the 15% average in the Auto Components industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Setting aside the comparison to its industry for a moment, XPEL's ROCE in absolute terms currently looks quite high.

We can see that , XPEL currently has an ROCE of 43% compared to its ROCE 3 years ago, which was 24%. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how XPEL's past growth compares to other companies.

NasdaqCM:XPEL Past Revenue and Net Income, August 10th 2019

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If XPEL is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

How XPEL's Current Liabilities Impact 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 counter this, investors can check if a company has high current liabilities relative to total assets.

XPEL has total liabilities of US$12m and total assets of US$39m. As a result, its current liabilities are equal to approximately 30% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.

What We Can Learn From XPEL's ROCE

Low current liabilities and high ROCE is a good combination, making XPEL look quite interesting. There might be better investments than XPEL 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.

I will like XPEL 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 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.