Yahoo Finance Why You Should Like Builders FirstSource, Inc.’s (NASDAQ:BLDR) ROCE
Today we'll evaluate Builders FirstSource, Inc. (NASDAQ:BLDR) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed 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 Builders FirstSource:
0.17 = US$408m ÷ (US$3.3b - US$864m) (Based on the trailing twelve months to September 2019.)
So, Builders FirstSource has an ROCE of 17%.
View our latest analysis for Builders FirstSource
Does Builders FirstSource Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Builders FirstSource's ROCE appears to be substantially greater than the 11% average in the Building 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. Regardless of where Builders FirstSource sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Our data shows that Builders FirstSource currently has an ROCE of 17%, compared to its ROCE of 9.7% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Builders FirstSource's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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.
How Builders FirstSource'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 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Builders FirstSource has total assets of US$3.3b and current liabilities of US$864m. Therefore its current liabilities are equivalent to approximately 26% of its total assets. Low current liabilities are not boosting the ROCE too much.
What We Can Learn From Builders FirstSource's ROCE
With that in mind, Builders FirstSource's ROCE appears pretty good. Builders FirstSource 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
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