Today we'll evaluate American Outdoor Brands Corporation (NASDAQ:AOBC) to determine whether it could have potential as an investment idea. 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. 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.'
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 American Outdoor Brands:
0.059 = US$36m ÷ (US$772m - US$164m) (Based on the trailing twelve months to July 2019.)
Therefore, American Outdoor Brands has an ROCE of 5.9%.
Does American Outdoor Brands Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, American Outdoor Brands's ROCE appears to be significantly below the 17% average in the Leisure industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Separate from how American Outdoor Brands stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
We can see that , American Outdoor Brands currently has an ROCE of 5.9%, less than the 35% it reported 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how American Outdoor Brands's past growth compares to other companies.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for American Outdoor Brands.
How American Outdoor Brands'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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
American Outdoor Brands has total liabilities of US$164m and total assets of US$772m. 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.
Our Take On American Outdoor Brands's ROCE
With that in mind, we're not overly impressed with American Outdoor Brands's ROCE, so it may not be the most appealing prospect. You might be able to find a better investment than American Outdoor Brands. 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).
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 firstname.lastname@example.org. 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.