Yahoo Finance A Close Look At Flight Centre Travel Group Limited’s (ASX:FLT) 20% ROCE
Today we are going to look at Flight Centre Travel Group Limited (ASX:FLT) 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 of all, we'll work out how to 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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?
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 Flight Centre Travel Group:
0.20 = AU$347m ÷ (AU$3.5b - AU$1.8b) (Based on the trailing twelve months to June 2019.)
Therefore, Flight Centre Travel Group has an ROCE of 20%.
See our latest analysis for Flight Centre Travel Group
Is Flight Centre Travel Group's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Flight Centre Travel Group's ROCE is meaningfully better than the 12% average in the Hospitality industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Flight Centre Travel Group sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
The image below shows how Flight Centre Travel Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Flight Centre Travel Group's Current Liabilities And Their Impact On 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Flight Centre Travel Group has total assets of AU$3.5b and current liabilities of AU$1.8b. Therefore its current liabilities are equivalent to approximately 50% of its total assets. This is admittedly a high level of current liabilities, improving ROCE substantially.
What We Can Learn From Flight Centre Travel Group's ROCE
The ROCE would not look as appealing if the company had fewer current liabilities. There might be better investments than Flight Centre Travel Group 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.
