Today we'll look at Cooper Tire & Rubber Company (NYSE:CTB) 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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'.
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 Cooper Tire & Rubber:
0.10 = US$198m ÷ (US$2.7b - US$716m) (Based on the trailing twelve months to March 2019.)
Therefore, Cooper Tire & Rubber has an ROCE of 10%.
Is Cooper Tire & Rubber's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Cooper Tire & Rubber's ROCE appears to be significantly below the 16% average in the Auto Components industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Setting aside the industry comparison for now, Cooper Tire & Rubber's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
Cooper Tire & Rubber's current ROCE of 10% is lower than its ROCE in the past, which was 23%, 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Cooper Tire & Rubber's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Cooper Tire & Rubber'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. 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.
Cooper Tire & Rubber has total assets of US$2.7b and current liabilities of US$716m. Therefore its current liabilities are equivalent to approximately 27% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.
What We Can Learn From Cooper Tire & Rubber's ROCE
That said, Cooper Tire & Rubber's ROCE is mediocre, there may be more attractive investments around. Of course, you might also be able to find a better stock than Cooper Tire & Rubber. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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 email@example.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.