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What Can We Make Of C.H. Robinson Worldwide, Inc.’s (NASDAQ:CHRW) High Return On Capital?

Today we are going to look at C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

What is 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. 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.'

So, How Do We Calculate ROCE?

Analysts use this formula to calculate return on capital employed:

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Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for C.H. Robinson Worldwide:

0.30 = US$954m ÷ (US$4.7b - US$1.5b) (Based on the trailing twelve months to June 2019.)

So, C.H. Robinson Worldwide has an ROCE of 30%.

View our latest analysis for C.H. Robinson Worldwide

Is C.H. Robinson Worldwide's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that C.H. Robinson Worldwide's ROCE is meaningfully better than the 10% average in the Logistics industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, C.H. Robinson Worldwide's ROCE currently appears to be excellent.

We can see that , C.H. Robinson Worldwide currently has an ROCE of 30%, less than the 47% it reported 3 years ago. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how C.H. Robinson Worldwide's past growth compares to other companies.

NasdaqGS:CHRW Past Revenue and Net Income, August 30th 2019
NasdaqGS:CHRW Past Revenue and Net Income, August 30th 2019

It is important to remember that ROCE shows past performance, and is 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, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for C.H. Robinson Worldwide.

What Are Current Liabilities, And How Do They Affect C.H. Robinson Worldwide's ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.

C.H. Robinson Worldwide has total assets of US$4.7b and current liabilities of US$1.5b. As a result, its current liabilities are equal to approximately 32% of its total assets. C.H. Robinson Worldwide has a medium level of current liabilities, boosting its ROCE somewhat.

The Bottom Line On C.H. Robinson Worldwide's ROCE

Even so, it has a great ROCE, and could be an attractive prospect for further research. There might be better investments than C.H. Robinson Worldwide out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.