Yahoo Finance Why We’re Not Keen On Canlan Ice Sports Corp.’s (TSE:ICE) 5.8% Return On Capital
Today we'll evaluate Canlan Ice Sports Corp. (TSE:ICE) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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?
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 Canlan Ice Sports:
0.058 = CA$6.5m ÷ (CA$140m - CA$27m) (Based on the trailing twelve months to September 2019.)
Therefore, Canlan Ice Sports has an ROCE of 5.8%.
Check out our latest analysis for Canlan Ice Sports
Is Canlan Ice Sports's ROCE Good?
One way to assess ROCE is to compare similar companies. We can see Canlan Ice Sports's ROCE is meaningfully below the Hospitality industry average of 8.1%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how Canlan Ice Sports stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
The image below shows how Canlan Ice Sports's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. If Canlan Ice Sports is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Canlan Ice Sports's Current Liabilities Impact Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Canlan Ice Sports has total liabilities of CA$27m and total assets of CA$140m. As a result, its current liabilities are equal to approximately 19% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
What We Can Learn From Canlan Ice Sports's ROCE
If Canlan Ice Sports continues to earn an uninspiring ROCE, there may be better places to invest. You might be able to find a better investment than Canlan Ice Sports. 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).
Canlan Ice Sports 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.
