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Today we'll look at World Fuel Services Corporation (NYSE:INT) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
How Do You Calculate Return On Capital Employed?
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 World Fuel Services:
0.11 = US$326m ÷ (US$5.8b - US$2.9b) (Based on the trailing twelve months to September 2019.)
Therefore, World Fuel Services has an ROCE of 11%.
Does World Fuel Services Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, we find that World Fuel Services's ROCE is meaningfully better than the 9.0% average in the Oil and Gas 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. Separate from World Fuel Services's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that, World Fuel Services currently has an ROCE of 11% compared to its ROCE 3 years ago, which was 7.3%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how World Fuel Services's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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 only a point-in-time measure. Remember that most companies like World Fuel Services are cyclical businesses. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for World Fuel Services.
World Fuel Services's Current Liabilities And Their Impact On 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. 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.
World Fuel Services has total assets of US$5.8b and current liabilities of US$2.9b. As a result, its current liabilities are equal to approximately 50% of its total assets. World Fuel Services's current liabilities are fairly high, which increases its ROCE significantly.
What We Can Learn From World Fuel Services's ROCE
While its ROCE looks decent, it wouldn't look so good if it reduced current liabilities. There might be better investments than World Fuel Services 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 World Fuel Services better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
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