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Are 1-800-FLOWERS.COM, Inc.’s (NASDAQ:FLWS) High Returns Really That Great?

Simply Wall St

Today we are going to look at 1-800-FLOWERS.COM, Inc. (NASDAQ:FLWS) to see whether it might be an attractive investment prospect. 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. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

How Do You Calculate Return On Capital Employed?

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 1-800-FLOWERS.COM:

0.096 = US$46m ÷ (US$606m - US$127m) (Based on the trailing twelve months to June 2019.)

Therefore, 1-800-FLOWERS.COM has an ROCE of 9.6%.

View our latest analysis for 1-800-FLOWERS.COM

Does 1-800-FLOWERS.COM Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, we find that 1-800-FLOWERS.COM's ROCE is meaningfully better than the 7.4% average in the Online Retail 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. Aside from the industry comparison, 1-800-FLOWERS.COM's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

You can click on the image below to see (in greater detail) how 1-800-FLOWERS.COM's past growth compares to other companies.

NasdaqGS:FLWS Past Revenue and Net Income, September 25th 2019

It is important to remember that ROCE shows past performance, and is 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for 1-800-FLOWERS.COM.

What Are Current Liabilities, And How Do They Affect 1-800-FLOWERS.COM's 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

1-800-FLOWERS.COM has total assets of US$606m and current liabilities of US$127m. Therefore its current liabilities are equivalent to approximately 21% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

What We Can Learn From 1-800-FLOWERS.COM's ROCE

That said, 1-800-FLOWERS.COM's ROCE is mediocre, there may be more attractive investments around. You might be able to find a better investment than 1-800-FLOWERS.COM. 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).

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

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.