Today we'll look at Skechers U.S.A., Inc. (NYSE:SKX) 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. Second, we'll look at its ROCE compared to similar companies. 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. 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 Skechers U.S.A:
0.15 = US$508m ÷ (US$4.6b - US$1.1b) (Based on the trailing twelve months to September 2019.)
So, Skechers U.S.A has an ROCE of 15%.
Is Skechers U.S.A's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Skechers U.S.A's ROCE appears to be substantially greater than the 12% average in the Luxury 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 where Skechers U.S.A sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Skechers U.S.A's current ROCE of 15% is lower than its ROCE in the past, which was 22%, 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Skechers U.S.A's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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 Skechers U.S.A.
Skechers U.S.A's Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Skechers U.S.A has total liabilities of US$1.1b and total assets of US$4.6b. Therefore its current liabilities are equivalent to approximately 24% of its total assets. Low current liabilities are not boosting the ROCE too much.
Our Take On Skechers U.S.A's ROCE
This is good to see, and with a sound ROCE, Skechers U.S.A could be worth a closer look. Skechers U.S.A 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 Skechers U.S.A better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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