Shareholders Should Look Hard At Conn's, Inc.’s (NASDAQ:CONN) 6.0%Return On Capital
Today we'll evaluate Conn's, Inc. (NASDAQ:CONN) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. 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?
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 Conn's:
0.06 = US$116m ÷ (US$2.2b - US$213m) (Based on the trailing twelve months to October 2019.)
So, Conn's has an ROCE of 6.0%.
See our latest analysis for Conn's
Is Conn's's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Conn's's ROCE is meaningfully below the Specialty Retail industry average of 11%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how Conn's stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
Conn's reported an ROCE of 6.0% -- better than 3 years ago, when the company didn't make a profit. That implies the business has been improving. The image below shows how Conn's's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. 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 Conn's.
How Conn's's Current Liabilities Impact 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Conn's has total assets of US$2.2b and current liabilities of US$213m. Therefore its current liabilities are equivalent to approximately 9.9% of its total assets. Conn's has a low level of current liabilities, which have a minimal impact on its uninspiring ROCE.
The Bottom Line On Conn's's ROCE
Based on this information, Conn's appears to be a mediocre business. Of course, you might also be able to find a better stock than Conn's. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Conn's better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.
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