Are The Kroger Co.’s (NYSE:KR) Returns Worth Your While?
Today we'll evaluate The Kroger Co. (NYSE:KR) 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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'.
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 Kroger:
0.084 = US$2.6b ÷ (US$45b - US$14b) (Based on the trailing twelve months to February 2020.)
Therefore, Kroger has an ROCE of 8.4%.
Check out our latest analysis for Kroger
Does Kroger Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Kroger's ROCE appears to be around the 7.1% average of the Consumer Retailing industry. Aside from the industry comparison, Kroger's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
We can see that, Kroger currently has an ROCE of 8.4%, less than the 15% it reported 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how Kroger's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Kroger.
What Are Current Liabilities, And How Do They Affect Kroger's 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.
Kroger has current liabilities of US$14b and total assets of US$45b. Therefore its current liabilities are equivalent to approximately 31% of its total assets. Kroger has a medium level of current liabilities, which would boost its ROCE somewhat.
The Bottom Line On Kroger's ROCE
With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. But note: make sure you look for a great company, not just the first idea you come across. 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.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.
