Yahoo Finance A Close Look At Huntington Ingalls Industries, Inc.’s (NYSE:HII) 22% ROCE
Today we are going to look at Huntington Ingalls Industries, Inc. (NYSE:HII) to see whether it might be an attractive investment prospect. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its 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. Generally speaking a higher ROCE is better. 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 Huntington Ingalls Industries:
0.22 = US$853m ÷ (US$6.2b – US$1.6b) (Based on the trailing twelve months to September 2018.)
So, Huntington Ingalls Industries has an ROCE of 22%.
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Is Huntington Ingalls Industries’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Huntington Ingalls Industries’s ROCE is meaningfully better than the 11% average in the Aerospace & Defense 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, Huntington Ingalls Industries’s ROCE in absolute terms currently looks quite high.
Our data shows that Huntington Ingalls Industries currently has an ROCE of 22%, compared to its ROCE of 16% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Huntington Ingalls Industries.
How Huntington Ingalls Industries’s Current Liabilities Impact Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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.
Huntington Ingalls Industries has total assets of US$6.2b and current liabilities of US$1.6b. Therefore its current liabilities are equivalent to approximately 26% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.
The Bottom Line On Huntington Ingalls Industries’s ROCE
With low current liabilities and a high ROCE, Huntington Ingalls Industries could be worthy of further investigation. You might be able to find a better buy than Huntington Ingalls Industries. 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).
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
