What Can We Make Of Insperity, Inc.’s (NYSE:NSP) High Return On Capital?

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Today we'll evaluate Insperity, Inc. (NYSE:NSP) 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the amount of pre-tax profits a company can generate from the 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.'

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 Insperity:

0.40 = US$200m ÷ (US$1.4b - US$850m) (Based on the trailing twelve months to March 2019.)

So, Insperity has an ROCE of 40%.

View our latest analysis for Insperity

Does Insperity Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Insperity's ROCE is meaningfully better than the 12% average in the Professional Services industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Setting aside the comparison to its industry for a moment, Insperity's ROCE in absolute terms currently looks quite high.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. 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 Insperity'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 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.

Insperity has total assets of US$1.4b and current liabilities of US$850m. Therefore its current liabilities are equivalent to approximately 63% of its total assets. Insperity's high level of current liabilities boost the ROCE - but its ROCE is still impressive.

Our Take On Insperity's ROCE

In my book, this business could be worthy of further research. There might be better investments than Insperity out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.