Menu Close

Evaluating Ball Corporation’s (NYSE:BLL) Investments In Its Business

View photos

Today we are going to look at Ball Corporation (NYSE:BLL) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

Firstly, 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 measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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.

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

Or for Ball:

0.091 = US$1.1b ÷ (US$16b – US$3.8b) (Based on the trailing twelve months to September 2019.)

Therefore, Ball has an ROCE of 9.1%.

View our latest analysis for Ball

Does Ball Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Ball’s ROCE appears to be around the 9.7% average of the Packaging industry. Setting aside the industry comparison for now, Ball’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.

Our data shows that Ball currently has an ROCE of 9.1%, compared to its ROCE of 6.2% 3 years ago. This makes us think the business might be improving. The image below shows how Ball’s ROCE compares to its industry, and you can click it to see more detail on its past growth.

NYSE:BLL Past Revenue and Net Income, November 8th 2019

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. 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 Ball’s Current Liabilities Impact 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. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Ball has total liabilities of US$3.8b and total assets of US$16b. Therefore its current liabilities are equivalent to approximately 23% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

What We Can Learn From Ball’s ROCE

That said, Ball’s ROCE is mediocre, there may be more attractive investments around. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.

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. Thank you for reading.