Yahoo Finance What Does National Presto Industries, Inc.’s (NYSE:NPK) 13% ROCE Say About The Business?
Today we'll evaluate National Presto Industries, Inc. (NYSE:NPK) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on 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. 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 National Presto Industries:
0.13 = US$47m ÷ (US$404m - US$45m) (Based on the trailing twelve months to September 2019.)
So, National Presto Industries has an ROCE of 13%.
View our latest analysis for National Presto Industries
Does National Presto Industries Have A Good ROCE?
One way to assess ROCE is to compare similar companies. It appears that National Presto Industries's ROCE is fairly close to the Aerospace & Defense industry average of 11%. Regardless of where National Presto Industries 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 National Presto Industries's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If National Presto Industries is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect National Presto Industries's ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
National Presto Industries has total assets of US$404m and current liabilities of US$45m. As a result, its current liabilities are equal to approximately 11% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
What We Can Learn From National Presto Industries's ROCE
Overall, National Presto Industries has a decent ROCE and could be worthy of further research. National Presto Industries shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
I will like National Presto Industries better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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