Yahoo Finance Are Spirit AeroSystems Holdings, Inc.’s (NYSE:SPR) High Returns Really That Great?
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Today we'll look at Spirit AeroSystems Holdings, Inc. (NYSE:SPR) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
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. 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'.
So, How Do We Calculate ROCE?
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 Spirit AeroSystems Holdings:
0.21 = US$960m ÷ (US$6.3b - US$1.8b) (Based on the trailing twelve months to March 2019.)
Therefore, Spirit AeroSystems Holdings has an ROCE of 21%.
Check out our latest analysis for Spirit AeroSystems Holdings
Is Spirit AeroSystems Holdings's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Spirit AeroSystems Holdings's ROCE appears to be substantially greater than the 12% average in the Aerospace & Defense industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, Spirit AeroSystems Holdings's ROCE in absolute terms currently looks quite high.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Spirit AeroSystems Holdings.
Do Spirit AeroSystems Holdings's Current Liabilities Skew Its 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.
Spirit AeroSystems Holdings has total liabilities of US$1.8b and total assets of US$6.3b. Therefore its current liabilities are equivalent to approximately 28% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.
The Bottom Line On Spirit AeroSystems Holdings's ROCE
This is good to see, and with such a high ROCE, Spirit AeroSystems Holdings may be worth a closer look. Spirit AeroSystems Holdings 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.
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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.
