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Is There More To Big Lots, Inc. (NYSE:BIG) Than Its 10% Returns On Capital?

Simply Wall St

Today we'll look at Big Lots, Inc. (NYSE:BIG) and reflect on its potential as an investment. 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. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting 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. In general, businesses with a higher ROCE are usually better quality. 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.'

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 Big Lots:

0.10 = US$228m ÷ (US$3.0b - US$855m) (Based on the trailing twelve months to May 2019.)

Therefore, Big Lots has an ROCE of 10%.

See our latest analysis for Big Lots

Does Big Lots Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. It appears that Big Lots's ROCE is fairly close to the Multiline Retail industry average of 12%. Aside from the industry comparison, Big Lots's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

Big Lots's current ROCE of 10% is lower than 3 years ago, when the company reported a 27% ROCE. So investors might consider if it has had issues recently. You can see in the image below how Big Lots's ROCE compares to its industry. Click to see more on past growth.

NYSE:BIG Past Revenue and Net Income, August 22nd 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Big Lots.

What Are Current Liabilities, And How Do They Affect Big Lots's ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Big Lots has total liabilities of US$855m and total assets of US$3.0b. Therefore its current liabilities are equivalent to approximately 28% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

Our Take On Big Lots's ROCE

If Big Lots continues to earn an uninspiring ROCE, there may be better places to invest. You might be able to find a better investment than Big Lots. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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 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. Thank you for reading.