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Today we'll look at World Wrestling Entertainment, Inc. (NYSE:WWE) and reflect on its potential as an investment. 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. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
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. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for World Wrestling Entertainment:
0.25 = US$91m ÷ (US$703m - US$345m) (Based on the trailing twelve months to March 2019.)
So, World Wrestling Entertainment has an ROCE of 25%.
Does World Wrestling Entertainment Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. World Wrestling Entertainment's ROCE appears to be substantially greater than the 10% average in the Entertainment industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of the industry comparison, in absolute terms, World Wrestling Entertainment's ROCE currently appears to be excellent.
As we can see, World Wrestling Entertainment currently has an ROCE of 25% compared to its ROCE 3 years ago, which was 19%. This makes us think about whether the company has been reinvesting shrewdly.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for World Wrestling Entertainment.
What Are Current Liabilities, And How Do They Affect World Wrestling Entertainment's 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.
World Wrestling Entertainment has total assets of US$703m and current liabilities of US$345m. Therefore its current liabilities are equivalent to approximately 49% of its total assets. A medium level of current liabilities boosts World Wrestling Entertainment's ROCE somewhat.
The Bottom Line On World Wrestling Entertainment's ROCE
Despite this, it reports a high ROCE, and may be worth investigating further. World Wrestling Entertainment looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
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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 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.