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Today we'll look at Ryerson Holding Corporation (NYSE:RYI) and reflect on its potential as an investment. 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.
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. All else being equal, a better business will have a higher ROCE. 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'.
So, How Do We Calculate ROCE?
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 Ryerson Holding:
0.11 = US$183m ÷ (US$2.3b - US$662m) (Based on the trailing twelve months to March 2019.)
Therefore, Ryerson Holding has an ROCE of 11%.
See our latest analysis for Ryerson Holding
Is Ryerson Holding's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Ryerson Holding's ROCE appears to be substantially greater than the 9.1% average in the Metals and Mining industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Ryerson Holding compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
You can see in the image below how Ryerson Holding's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. We note Ryerson Holding could be considered a cyclical business. Since the future is so important for investors, you should check out our free report on analyst forecasts for Ryerson Holding.