Today we'll evaluate Ball Corporation (NYSE:BLL) 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. 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 Ball:
0.10 = US$1.2b ÷ (US$17b - US$5.6b) (Based on the trailing twelve months to December 2019.)
So, Ball has an ROCE of 10.0%.
Check out our latest analysis for Ball
Is Ball's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Ball's ROCE is around the 9.6% average reported by the Packaging industry. Independently of how Ball compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
We can see that, Ball currently has an ROCE of 10.0% compared to its ROCE 3 years ago, which was 6.7%. This makes us think the business might be improving. The image below shows how Ball's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Ball.
Do Ball's Current Liabilities Skew 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.
Ball has total assets of US$17b and current liabilities of US$5.6b. As a result, its current liabilities are equal to approximately 32% of its total assets. Ball has a middling amount of current liabilities, increasing its ROCE somewhat.
What We Can Learn From Ball's ROCE
Ball's ROCE does look good, but the level of current liabilities also contribute to that. There might be better investments than Ball out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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.
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. Thank you for reading.
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April 30, 2020 at 05:13PM
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What Can We Learn From Ball Corporation’s (NYSE:BLL) Investment Returns? - Yahoo Finance
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