Evaluating H&E Equipment Services, Inc.’s (NASDAQ:HEES) Investments In Its Business

Today we'll look at H&E Equipment Services, Inc. (NASDAQ:HEES) 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 of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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.

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 H&E Equipment Services:

0.098 = US$187m ÷ (US$2.1b - US$158m) (Based on the trailing twelve months to September 2019.)

Therefore, H&E Equipment Services has an ROCE of 9.8%.

See our latest analysis for H&E Equipment Services

Is H&E Equipment Services's ROCE Good?

One way to assess ROCE is to compare similar companies. We can see H&E Equipment Services's ROCE is around the 9.0% average reported by the Trade Distributors industry. Independently of how H&E Equipment Services compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

The image below shows how H&E Equipment Services'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. 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.

How H&E Equipment Services's Current Liabilities Impact Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.

H&E Equipment Services has total liabilities of US$158m and total assets of US$2.1b. As a result, its current liabilities are equal to approximately 7.6% of its total assets. In addition to low current liabilities (making a negligible impact on ROCE), H&E Equipment Services earns a sound return on capital employed.

Our Take On H&E Equipment Services's ROCE

If H&E Equipment Services can continue reinvesting in its business, it could be an attractive prospect. H&E Equipment Services shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.