Yahoo Finance Are U.S. Silica Holdings, Inc.’s Returns On Capital Worth Investigating?
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Today we’ll look at U.S. Silica Holdings, Inc. (NYSE:SLCA) and reflect on its potential as an investment. 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. Then we’ll compare its ROCE to similar companies. And finally, we’ll look at how its current liabilities are impacting 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. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
How Do You Calculate Return On Capital Employed?
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 U.S. Silica Holdings:
0.063 = US$169m ÷ (US$3.3b – US$286m) (Based on the trailing twelve months to September 2018.)
Therefore, U.S. Silica Holdings has an ROCE of 6.3%.
View our latest analysis for U.S. Silica Holdings
Is U.S. Silica Holdings’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. It appears that U.S. Silica Holdings’s ROCE is fairly close to the Energy Services industry average of 7.4%. Setting aside the industry comparison for now, U.S. Silica Holdings’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
When considering this metric, keep in mind that it is backwards looking, and 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. Remember that most companies like U.S. Silica Holdings are cyclical businesses. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How U.S. Silica Holdings’s Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
U.S. Silica Holdings has total assets of US$3.3b and current liabilities of US$286m. Therefore its current liabilities are equivalent to approximately 8.7% of its total assets. U.S. Silica Holdings reports few current liabilities, which have a negligible impact on its unremarkable ROCE.
The Bottom Line On U.S. Silica Holdings’s ROCE
Based on this information, U.S. Silica Holdings appears to be a mediocre business. Of course you might be able to find a better stock than U.S. Silica Holdings. 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. Thank you for reading.
