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How Good Is Oxford Industries, Inc. (NYSE:OXM) At Creating Shareholder Value?

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Today we'll evaluate Oxford Industries, Inc. (NYSE:OXM) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. 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 measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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 Oxford Industries:

0.11 = US$97m ÷ (US$1.0b - US$164m) (Based on the trailing twelve months to November 2019.)

Therefore, Oxford Industries has an ROCE of 11%.

Check out our latest analysis for Oxford Industries

Does Oxford Industries Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Oxford Industries's ROCE appears to be around the 11% average of the Luxury industry. Regardless of where Oxford Industries sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

Oxford Industries's current ROCE of 11% is lower than 3 years ago, when the company reported a 17% ROCE. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how Oxford Industries's past growth compares to other companies.

NYSE:OXM Past Revenue and Net Income, January 7th 2020
NYSE:OXM Past Revenue and Net Income, January 7th 2020

It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during 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 Oxford Industries.

Oxford Industries's Current Liabilities And Their Impact On 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.

Oxford Industries has total assets of US$1.0b and current liabilities of US$164m. Therefore its current liabilities are equivalent to approximately 16% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

Our Take On Oxford Industries's ROCE

Overall, Oxford Industries has a decent ROCE and could be worthy of further research. Oxford Industries shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.

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. Thank you for reading.