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Today we are going to look at Dick's Sporting Goods, Inc. (NYSE:DKS) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. 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 measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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.'
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 Dick's Sporting Goods:
0.17 = US$445m ÷ (US$4.2b - US$1.5b) (Based on the trailing twelve months to February 2019.)
So, Dick's Sporting Goods has an ROCE of 17%.
Does Dick's Sporting Goods Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Dick's Sporting Goods's ROCE is meaningfully higher than the 13% average in the Specialty Retail industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Dick's Sporting Goods sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Dick's Sporting Goods's current ROCE of 17% is lower than 3 years ago, when the company reported a 23% ROCE. This makes us wonder if the business is facing new challenges.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Dick's Sporting Goods.
Dick's Sporting Goods'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 counter this, investors can check if a company has high current liabilities relative to total assets.
Dick's Sporting Goods has total liabilities of US$1.5b and total assets of US$4.2b. Therefore its current liabilities are equivalent to approximately 36% of its total assets. Dick's Sporting Goods has a medium level of current liabilities, which would boost the ROCE.
Our Take On Dick's Sporting Goods's ROCE
Dick's Sporting Goods's ROCE does look good, but the level of current liabilities also contribute to that. But note: Dick's Sporting Goods 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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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 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.