Today we'll look at Enerpac Tool Group Corp. (NYSE:EPAC) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE 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. In general, businesses with a higher ROCE are usually better quality. 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 Enerpac Tool Group:
0.097 = US$73m ÷ (US$909m - US$157m) (Based on the trailing twelve months to November 2019.)
Therefore, Enerpac Tool Group has an ROCE of 9.7%.
See our latest analysis for Enerpac Tool Group
Is Enerpac Tool Group's ROCE Good?
One way to assess ROCE is to compare similar companies. We can see Enerpac Tool Group's ROCE is around the 11% average reported by the Machinery industry. Separate from Enerpac Tool Group's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
In our analysis, Enerpac Tool Group's ROCE appears to be 9.7%, compared to 3 years ago, when its ROCE was 5.9%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Enerpac Tool Group's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is 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. 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 Enerpac Tool Group.
Enerpac Tool Group's Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
Enerpac Tool Group has current liabilities of US$157m and total assets of US$909m. As a result, its current liabilities are equal to approximately 17% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
What We Can Learn From Enerpac Tool Group's ROCE
This is good to see, and with a sound ROCE, Enerpac Tool Group could be worth a closer look. Enerpac Tool Group looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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.
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. Thank you for reading.
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Are Enerpac Tool Group Corp.’s Returns On Capital Worth Investigating? - Yahoo Finance
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