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Lockheed Martin Corporation (NYSE:LMT) Earns Among The Best Returns In Its Industry

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Today we’ll evaluate Lockheed Martin Corporation (NYSE:LMT) 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 up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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:

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Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

Or for Lockheed Martin:

0.24 = US$7.2b ÷ (US$45b – US$14b) (Based on the trailing twelve months to December 2018.)

Therefore, Lockheed Martin has an ROCE of 24%.

Check out our latest analysis for Lockheed Martin

Is Lockheed Martin’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Lockheed Martin’s ROCE is meaningfully better 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. Regardless of the industry comparison, in absolute terms, Lockheed Martin’s ROCE currently appears to be excellent.

In our analysis, Lockheed Martin’s ROCE appears to be 24%, compared to 3 years ago, when its ROCE was 13%. This makes us think about whether the company has been reinvesting shrewdly.

NYSE:LMT Last Perf February 18th 19
NYSE:LMT Last Perf February 18th 19

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. 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 Lockheed Martin.

Lockheed Martin’s Current Liabilities And Their Impact On Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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.

Lockheed Martin has total liabilities of US$14b and total assets of US$45b. As a result, its current liabilities are equal to approximately 32% of its total assets. Lockheed Martin’s ROCE is boosted somewhat by its middling amount of current liabilities.

What We Can Learn From Lockheed Martin’s ROCE

Despite this, it reports a high ROCE, and may be worth investigating further. Of course you might be able to find a better stock than Lockheed Martin. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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. On rare occasion, data errors may occur. Thank you for reading.