In This Article:
Today we are going to look at Celanese Corporation (NYSE:CE) to see whether it might be an attractive investment prospect. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. Last but not least, we’ll look at what impact its current liabilities have on 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. In general, businesses with a higher ROCE are usually better quality. 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?
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 Celanese:
0.17 = US$970m ÷ (US$9.8b – US$1.5b) (Based on the trailing twelve months to September 2018.)
So, Celanese has an ROCE of 17%.
See our latest analysis for Celanese
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Does Celanese Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Celanese’s ROCE appears to be substantially greater than the 12% average in the Chemicals 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 Celanese compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
In our analysis, Celanese’s ROCE appears to be 17%, compared to 3 years ago, when its ROCE was 8.9%. This makes us wonder if the company is improving.
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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.