How Do Weyco Group, Inc.’s (NASDAQ:WEYS) Returns On Capital Compare To Peers?
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Today we are going to look at Weyco Group, Inc. (NASDAQ:WEYS) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
What is 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. 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.'
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 Weyco Group:
0.11 = US$26m ÷ (US$270m - US$36m) (Based on the trailing twelve months to December 2018.)
Therefore, Weyco Group has an ROCE of 11%.
View our latest analysis for Weyco Group
Is Weyco Group's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Weyco Group's ROCE appears meaningfully below the 17% average reported by the Retail Distributors industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from Weyco Group's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
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. You can check if Weyco Group has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Do Weyco Group's Current Liabilities Skew 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.
Weyco Group has total assets of US$270m and current liabilities of US$36m. As a result, its current liabilities are equal to approximately 13% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
What We Can Learn From Weyco Group's ROCE
This is good to see, and with a sound ROCE, Weyco Group could be worth a closer look. Of course you might be able to find a better stock than Weyco Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.
