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How Do Unifi, Inc.’s (NYSE:UFI) Returns On Capital Compare To Peers?

Simply Wall St

Today we are going to look at Unifi, Inc. (NYSE:UFI) to see whether it might be an attractive investment prospect. 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, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared 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 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. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

How Do You Calculate Return On Capital Employed?

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 Unifi:

0.026 = US$13m ÷ (US$591m - US$75m) (Based on the trailing twelve months to September 2019.)

Therefore, Unifi has an ROCE of 2.6%.

View our latest analysis for Unifi

Does Unifi Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. We can see Unifi's ROCE is meaningfully below the Luxury 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. Putting aside Unifi's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.

Unifi's current ROCE of 2.6% is lower than its ROCE in the past, which was 10%, 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how Unifi's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NYSE:UFI Past Revenue and Net Income, December 17th 2019

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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Unifi.

Unifi'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 counter this, investors can check if a company has high current liabilities relative to total assets.

Unifi has total assets of US$591m and current liabilities of US$75m. As a result, its current liabilities are equal to approximately 13% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.

The Bottom Line On Unifi's ROCE

While that is good to see, Unifi has a low ROCE and does not look attractive in this analysis. Of course, you might also be able to find a better stock than Unifi. So you may wish to see this free collection of other companies that have grown earnings strongly.

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 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.

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. Thank you for reading.