Yahoo Finance Are GDI Integrated Facility Services Inc.’s (TSE:GDI) Returns On Investment Worth Your While?
Today we'll look at GDI Integrated Facility Services Inc. (TSE:GDI) and reflect on its potential as an investment. 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 of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. 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. 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?
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 GDI Integrated Facility Services:
0.063 = CA$34m ÷ (CA$764m - CA$226m) (Based on the trailing twelve months to March 2020.)
So, GDI Integrated Facility Services has an ROCE of 6.3%.
Check out our latest analysis for GDI Integrated Facility Services
Is GDI Integrated Facility Services's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see GDI Integrated Facility Services's ROCE is around the 7.3% average reported by the Commercial Services industry. 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. It is possible that there are more rewarding investments out there.
The image below shows how GDI Integrated Facility Services's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. 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?
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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
GDI Integrated Facility Services has total assets of CA$764m and current liabilities of CA$226m. As a result, its current liabilities are equal to approximately 30% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.
Our Take On GDI Integrated Facility Services's ROCE
That said, GDI Integrated Facility Services's ROCE is mediocre, there may be more attractive investments around. You might be able to find a better investment than GDI Integrated Facility Services. 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).
GDI Integrated Facility Services is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider 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.
