Why We Like Clarkson PLCs (LON:CKN) 9.2% Return On Capital Employed – Simply Wall St News
Today we’ll look at Clarkson PLC (LON:CKN) and reflect on its potential as an investment. 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. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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 Clarkson:
0.092 = UK£46m ÷ (UK£642m – UK£143m) (Based on the trailing twelve months to June 2019.)
So, Clarkson has an ROCE of 9.2%.
Check out our latest analysis for Clarkson
Is Clarkson’s ROCE Good?
One way to assess ROCE is to compare similar companies. In our analysis, Clarkson’s ROCE is meaningfully higher than the 5.4% average in the Shipping industry. I think that’s good to see, since it implies the company is better than other....