Today we'll look at Cooper-Standard Holdings Inc. (NYSE:CPS) 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. Last but not least, we'll look at what impact its current liabilities have on 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. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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 Cooper-Standard Holdings:

0.04 = US$79m ÷ (US$2.6b - US$697m) (Based on the trailing twelve months to September 2019.)

Therefore, Cooper-Standard Holdings has an ROCE of 4.0%.

View our latest analysis for Cooper-Standard Holdings

Does Cooper-Standard Holdings Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, Cooper-Standard Holdings's ROCE appears to be significantly below the 13% average in the Auto Components industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Cooper-Standard Holdings 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.

Cooper-Standard Holdings's current ROCE of 4.0% is lower than 3 years ago, when the company reported a 16% ROCE. Therefore we wonder if the company is facing new headwinds. The image below shows how Cooper-Standard Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Cooper-Standard Holdings.

Cooper-Standard Holdings's Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Cooper-Standard Holdings has total assets of US$2.6b and current liabilities of US$697m. As a result, its current liabilities are equal to approximately 26% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.

Our Take On Cooper-Standard Holdings's ROCE

While that is good to see, Cooper-Standard Holdings has a low ROCE and does not look attractive in this analysis. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.