Yahoo Finance Is Ridley Corporation Limited (ASX:RIC) Investing Your Capital Efficiently?
Today we'll evaluate Ridley Corporation Limited (ASX:RIC) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting 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. 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. 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 Ridley:
0.035 = AU$16m ÷ (AU$645m - AU$194m) (Based on the trailing twelve months to December 2019.)
So, Ridley has an ROCE of 3.5%.
Check out our latest analysis for Ridley
Does Ridley Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Ridley's ROCE is meaningfully below the Food industry average of 6.1%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Ridley compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.1% available in government bonds. Readers may wish to look for more rewarding investments.
We can see that, Ridley currently has an ROCE of 3.5%, less than the 11% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how Ridley's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. 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.
Ridley's Current Liabilities And Their Impact On Its 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.
Ridley has total assets of AU$645m and current liabilities of AU$194m. Therefore its current liabilities are equivalent to approximately 30% of its total assets. Ridley has a medium level of current liabilities (boosting the ROCE somewhat), and a low ROCE.
The Bottom Line On Ridley's ROCE
This company may not be the most attractive investment prospect. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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.
