Yahoo Finance Armstrong World Industries, Inc. (NYSE:AWI) Earns Among The Best Returns In Its Industry
Today we'll evaluate Armstrong World Industries, Inc. (NYSE:AWI) to determine whether it could have potential as an investment idea. 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. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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.
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 Armstrong World Industries:
0.19 = US$255m ÷ (US$1.5b - US$155m) (Based on the trailing twelve months to December 2019.)
Therefore, Armstrong World Industries has an ROCE of 19%.
See our latest analysis for Armstrong World Industries
Does Armstrong World Industries Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Armstrong World Industries's ROCE is meaningfully better than the 13% average in the Building industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Armstrong World Industries compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
We can see that, Armstrong World Industries currently has an ROCE of 19% compared to its ROCE 3 years ago, which was 7.5%. This makes us think the business might be improving. The image below shows how Armstrong World Industries's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Armstrong World Industries.
Do Armstrong World Industries's Current Liabilities Skew 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. 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.
Armstrong World Industries has total assets of US$1.5b and current liabilities of US$155m. As a result, its current liabilities are equal to approximately 10% of its total assets. Low current liabilities are not boosting the ROCE too much.
The Bottom Line On Armstrong World Industries's ROCE
This is good to see, and with a sound ROCE, Armstrong World Industries could be worth a closer look. Armstrong World Industries looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
