EnPro Industries, Inc. (NYSE:NPO) Might Not Be A Great Investment
Today we'll look at EnPro Industries, Inc. (NYSE:NPO) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed 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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
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 EnPro Industries:
0.057 = US$100m ÷ (US$2.0b - US$281m) (Based on the trailing twelve months to March 2020.)
So, EnPro Industries has an ROCE of 5.7%.
View our latest analysis for EnPro Industries
Is EnPro Industries's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, EnPro Industries's ROCE appears to be significantly below the 10.0% average in the Machinery industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, EnPro Industries'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.
EnPro Industries's current ROCE of 5.7% is lower than its ROCE in the past, which was 12%, 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how EnPro Industries's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for EnPro Industries.
EnPro Industries's Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.
EnPro Industries has total assets of US$2.0b and current liabilities of US$281m. As a result, its current liabilities are equal to approximately 14% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.
Our Take On EnPro Industries's ROCE
With that in mind, we're not overly impressed with EnPro Industries's ROCE, so it may not be the most appealing prospect. You might be able to find a better investment than EnPro Industries. 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).
I will like EnPro Industries better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.
