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Today we'll look at Hamilton Beach Brands Holding Company (NYSE:HBB) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we'll look at what ROCE is and how we calculate it. 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.
What is Return On Capital Employed (ROCE)?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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.'
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 Hamilton Beach Brands Holding:
0.27 = US$31m ÷ (US$302m - US$188m) (Based on the trailing twelve months to March 2019.)
Therefore, Hamilton Beach Brands Holding has an ROCE of 27%.
Is Hamilton Beach Brands Holding's ROCE Good?
One way to assess ROCE is to compare similar companies. In our analysis, Hamilton Beach Brands Holding's ROCE is meaningfully higher than the 11% average in the Consumer Durables industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, Hamilton Beach Brands Holding's ROCE is currently very good.
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 only a point-in-time measure. If Hamilton Beach Brands Holding is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Hamilton Beach Brands Holding'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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Hamilton Beach Brands Holding has total assets of US$302m and current liabilities of US$188m. Therefore its current liabilities are equivalent to approximately 62% of its total assets. Hamilton Beach Brands Holding boasts an attractive ROCE, even after considering the boost from high current liabilities.
What We Can Learn From Hamilton Beach Brands Holding's ROCE
So we would be interested in doing more research here -- there may be an opportunity! Hamilton Beach Brands Holding 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.
I will like Hamilton Beach Brands Holding better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.