Today we'll look at Spin Master Corp. (TSE:TOY) 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.
First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting 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. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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 Spin Master:
0.16 = US$137m ÷ (US$1.4b - US$493m) (Based on the trailing twelve months to September 2019.)
So, Spin Master has an ROCE of 16%.
Is Spin Master's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. It appears that Spin Master's ROCE is fairly close to the Leisure industry average of 16%. Separate from Spin Master's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that, Spin Master currently has an ROCE of 16%, less than the 29% it reported 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 Spin Master's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Spin Master's Current Liabilities And Their Impact On Its 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.
Spin Master has total assets of US$1.4b and current liabilities of US$493m. Therefore its current liabilities are equivalent to approximately 36% of its total assets. With this level of current liabilities, Spin Master's ROCE is boosted somewhat.
The Bottom Line On Spin Master's ROCE
Spin Master's ROCE does look good, but the level of current liabilities also contribute to that. There might be better investments than Spin Master out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
If you spot an error that warrants correction, please contact the editor at email@example.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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