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Are UniFirst Corporation’s (NYSE:UNF) Returns Worth Your While?

Simply Wall St

Today we'll look at UniFirst Corporation (NYSE:UNF) and reflect on its potential as an investment. 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 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 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 UniFirst:

0.11 = US$197m ÷ (US$2.0b - US$174m) (Based on the trailing twelve months to May 2019.)

Therefore, UniFirst has an ROCE of 11%.

Check out our latest analysis for UniFirst

Does UniFirst Have A Good ROCE?

One way to assess ROCE is to compare similar companies. It appears that UniFirst's ROCE is fairly close to the Commercial Services industry average of 11%. Separate from UniFirst's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

You can see in the image below how UniFirst's ROCE compares to its industry. Click to see more on past growth.

NYSE:UNF Past Revenue and Net Income, October 15th 2019
NYSE:UNF Past Revenue and Net Income, October 15th 2019

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. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for UniFirst.

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

UniFirst has total liabilities of US$174m and total assets of US$2.0b. Therefore its current liabilities are equivalent to approximately 8.8% of its total assets. In addition to low current liabilities (making a negligible impact on ROCE), UniFirst earns a sound return on capital employed.

Our Take On UniFirst's ROCE

This is good to see, and while better prospects may exist, UniFirst seems worth researching further. UniFirst looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

I will like UniFirst better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.