Yahoo Finance IDP Education Limited (ASX:IEL) Earns Among The Best Returns In Its Industry
Today we are going to look at IDP Education Limited (ASX:IEL) to see whether it might be an attractive investment prospect. 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. 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.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
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 IDP Education:
0.39 = AU$125m ÷ (AU$479m - AU$161m) (Based on the trailing twelve months to December 2019.)
Therefore, IDP Education has an ROCE of 39%.
See our latest analysis for IDP Education
Is IDP Education's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that IDP Education's ROCE is meaningfully better than the 9.2% average in the Consumer Services industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Setting aside the comparison to its industry for a moment, IDP Education's ROCE in absolute terms currently looks quite high.
IDP Education's current ROCE of 39% is lower than 3 years ago, when the company reported a 63% ROCE. Therefore we wonder if the company is facing new headwinds. You can see in the image below how IDP Education's ROCE compares to its industry. Click to see more on 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.
How IDP Education's Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
IDP Education has total assets of AU$479m and current liabilities of AU$161m. As a result, its current liabilities are equal to approximately 34% of its total assets. IDP Education's ROCE is boosted somewhat by its middling amount of current liabilities.
What We Can Learn From IDP Education's ROCE
Still, it has a high ROCE, and may be an interesting prospect for further research. IDP Education 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.
If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.
