Today we’ll evaluate Barnes & Noble Education, Inc. (NYSE:BNED) 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.
Firstly, we’ll go over how we 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.
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. 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?
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 Barnes & Noble Education:
0.065 = US$41m ÷ (US$1.3b – US$685m) (Based on the trailing twelve months to January 2019.)
So, Barnes & Noble Education has an ROCE of 6.5%.
Is Barnes & Noble Education’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Barnes & Noble Education’s ROCE appears meaningfully below the 13% average reported by the Specialty Retail industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Setting aside the industry comparison for now, Barnes & Noble Education’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.
As we can see, Barnes & Noble Education currently has an ROCE of 6.5% compared to its ROCE 3 years ago, which was 2.7%. This makes us think about whether the company has been reinvesting shrewdly.
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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Barnes & Noble Education’s Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Barnes & Noble Education has total assets of US$1.3b and current liabilities of US$685m. Therefore its current liabilities are equivalent to approximately 52% of its total assets. Barnes & Noble Education’s current liabilities are fairly high, making its ROCE look better than otherwise.
The Bottom Line On Barnes & Noble Education’s ROCE
Notably, it also has a mediocre ROCE, which to my mind is not an appealing combination. But note: Barnes & Noble Education may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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If you spot an error that warrants correction, please contact the editor at email@example.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.