Today we'll evaluate United States Cellular Corporation (NYSE:USM) to determine whether it could have potential as an investment idea. 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. 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. Overall, it is a valuable metric that has its flaws. 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?
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 United States Cellular:
0.018 = US$130m ÷ (US$8.2b - US$750m) (Based on the trailing twelve months to December 2019.)
So, United States Cellular has an ROCE of 1.8%.
Is United States Cellular's ROCE Good?
One way to assess ROCE is to compare similar companies. We can see United States Cellular's ROCE is meaningfully below the Wireless Telecom industry average of 4.8%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how United States Cellular stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
We can see that, United States Cellular currently has an ROCE of 1.8% compared to its ROCE 3 years ago, which was 0.8%. This makes us wonder if the company is improving. The image below shows how United States Cellular'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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for United States Cellular.
What Are Current Liabilities, And How Do They Affect United States Cellular's 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
United States Cellular has current liabilities of US$750m and total assets of US$8.2b. Therefore its current liabilities are equivalent to approximately 9.2% of its total assets. United States Cellular has very few current liabilities, which have a minimal effect on its already low ROCE.
What We Can Learn From United States Cellular's ROCE
Nevertheless, there are potentially more attractive companies to invest in. You might be able to find a better investment than United States Cellular. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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 firstname.lastname@example.org. 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.
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