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Should You Worry About Penske Automotive Group, Inc.’s (NYSE:PAG) ROCE?

Simply Wall St

Today we'll evaluate Penske Automotive Group, Inc. (NYSE:PAG) 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. 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.

Understanding 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. All else being equal, a better business will have a higher ROCE. 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 Penske Automotive Group:

0.077 = US$631m ÷ (US$13b - US$5.2b) (Based on the trailing twelve months to June 2019.)

Therefore, Penske Automotive Group has an ROCE of 7.7%.

Check out our latest analysis for Penske Automotive Group

Is Penske Automotive Group's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Penske Automotive Group's ROCE appears meaningfully below the 10% average reported by the Specialty Retail industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Setting aside the industry comparison for now, Penske Automotive Group's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

Penske Automotive Group's current ROCE of 7.7% is lower than its ROCE in the past, which was 14%, 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Penske Automotive Group's ROCE compares to its industry. Click to see more on past growth.

NYSE:PAG Past Revenue and Net Income, September 23rd 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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 Penske Automotive Group.

What Are Current Liabilities, And How Do They Affect Penske Automotive Group's ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Penske Automotive Group has total assets of US$13b and current liabilities of US$5.2b. Therefore its current liabilities are equivalent to approximately 39% of its total assets. Penske Automotive Group has a medium level of current liabilities, which would boost its ROCE somewhat.

The Bottom Line On Penske Automotive Group's ROCE

Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. You might be able to find a better investment than Penske Automotive Group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

I will like Penske Automotive Group 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.