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Examining GDI Integrated Facility Services Inc.’s (TSE:GDI) Weak Return On Capital Employed

Jodi Pearce

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Today we are going to look at GDI Integrated Facility Services Inc. (TSE:GDI) to see whether it might be an attractive investment prospect. 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. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. 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’.

So, How Do We Calculate ROCE?

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 GDI Integrated Facility Services:

0.064 = CA$24m ÷ (CA$551m – CA$141m) (Based on the trailing twelve months to September 2018.)

Therefore, GDI Integrated Facility Services has an ROCE of 6.4%.

Check out our latest analysis for GDI Integrated Facility Services

Does GDI Integrated Facility Services Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. We can see GDI Integrated Facility Services’s ROCE is meaningfully below the Commercial Services industry average of 8.3%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Aside from the industry comparison, GDI Integrated Facility Services’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.

In our analysis, GDI Integrated Facility Services’s ROCE appears to be 6.4%, compared to 3 years ago, when its ROCE was 5.1%. This makes us wonder if the company is improving.

TSX:GDI Past Revenue and Net Income, February 20th 2019

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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for GDI Integrated Facility Services.

What Are Current Liabilities, And How Do They Affect GDI Integrated Facility Services’s 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 counter this, investors can check if a company has high current liabilities relative to total assets.

GDI Integrated Facility Services has total liabilities of CA$141m and total assets of CA$551m. As a result, its current liabilities are equal to approximately 26% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

The Bottom Line On GDI Integrated Facility Services’s ROCE

With that in mind, we’re not overly impressed with GDI Integrated Facility Services’s ROCE, so it may not be the most appealing prospect. Of course you might be able to find a better stock than GDI Integrated Facility Services. 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 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.