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Are The Children’s Place, Inc.’s (NASDAQ:PLCE) High Returns Really That Great?

Today we’ll look at The Children’s Place, Inc. (NASDAQ:PLCE) and reflect on its potential as an investment. 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. Then we’ll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’

So, How Do We Calculate ROCE?

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 Children’s Place:

0.37 = US$172m ÷ (US$837m – US$412m) (Based on the trailing twelve months to November 2018.)

So, Children’s Place has an ROCE of 37%.

See our latest analysis for Children’s Place

Is Children’s Place’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Children’s Place’s ROCE appears to be substantially greater than the 13% average in the Specialty Retail industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, Children’s Place’s ROCE is currently very good.

In our analysis, Children’s Place’s ROCE appears to be 37%, compared to 3 years ago, when its ROCE was 14%. This makes us think about whether the company has been reinvesting shrewdly.

NASDAQGS:PLCE Last Perf January 28th 19
NASDAQGS:PLCE Last Perf January 28th 19

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Children’s Place’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. 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.

Children’s Place has total assets of US$837m and current liabilities of US$412m. Therefore its current liabilities are equivalent to approximately 49% of its total assets. Children’s Place has a medium level of current liabilities, boosting its ROCE somewhat.

What We Can Learn From Children’s Place’s ROCE

Even so, it has a great ROCE, and could be an attractive prospect for further research. But note: Children’s Place 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).

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

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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