Yahoo Finance Why Great Canadian Gaming Corporation’s (TSE:GC) Return On Capital Employed Is Impressive
Today we are going to look at Great Canadian Gaming Corporation (TSE:GC) 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.
Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
What is 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. Generally speaking a higher ROCE is better. 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’.
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 Great Canadian Gaming:
0.20 = CA$154m ÷ (CA$1.8b – CA$227m) (Based on the trailing twelve months to September 2018.)
So, Great Canadian Gaming has an ROCE of 20%.
Check out our latest analysis for Great Canadian Gaming
Does Great Canadian Gaming Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Great Canadian Gaming’s ROCE is meaningfully higher than the 9.3% average in the Hospitality industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Setting aside the comparison to its industry for a moment, Great Canadian Gaming’s ROCE in absolute terms currently looks quite high.
Our data shows that Great Canadian Gaming currently has an ROCE of 20%, compared to its ROCE of 15% 3 years ago. This makes us think the business might be improving.
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. 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 Great Canadian Gaming.
How Great Canadian Gaming’s Current Liabilities Impact 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.
Great Canadian Gaming has total liabilities of CA$227m and total assets of CA$1.8b. As a result, its current liabilities are equal to approximately 13% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.
Our Take On Great Canadian Gaming’s ROCE
With low current liabilities and a high ROCE, Great Canadian Gaming could be worthy of further investigation. But note: Great Canadian Gaming may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
