Yahoo Finance Here’s What Churchill Downs Incorporated’s (NASDAQ:CHDN) ROCE Can Tell Us
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Today we are going to look at Churchill Downs Incorporated (NASDAQ:CHDN) to see whether it might be an attractive investment prospect. 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. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
Understanding 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. Generally speaking a higher ROCE is better. 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 Churchill Downs:
0.14 = US$188m ÷ (US$1.7b – US$211m) (Based on the trailing twelve months to September 2018.)
Therefore, Churchill Downs has an ROCE of 14%.
Check out our latest analysis for Churchill Downs
Does Churchill Downs Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Churchill Downs’s ROCE is meaningfully higher than the 9.7% average in the Hospitality 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. Independently of how Churchill Downs compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
In our analysis, Churchill Downs’s ROCE appears to be 14%, compared to 3 years ago, when its ROCE was 11%. This makes us wonder if the company is improving.
When considering this metric, keep in mind that it is backwards looking, and 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Churchill Downs.
What Are Current Liabilities, And How Do They Affect Churchill Downs’s ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Churchill Downs has total liabilities of US$211m and total assets of US$1.7b. Therefore its current liabilities are equivalent to approximately 12% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
What We Can Learn From Churchill Downs’s ROCE
This is good to see, and with a sound ROCE, Churchill Downs could be worth a closer look. Of course you might be able to find a better stock than Churchill Downs. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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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.
