Today we are going to look at Canada Goose Holdings Inc. (TSE:GOOS) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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. 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?
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 Canada Goose Holdings:
0.22 = CA$193m ÷ (CA$996m - CA$140m) (Based on the trailing twelve months to June 2019.)
Therefore, Canada Goose Holdings has an ROCE of 22%.
Does Canada Goose Holdings Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In our analysis, Canada Goose Holdings's ROCE is meaningfully higher than the 12% average in the Luxury industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, Canada Goose Holdings's ROCE in absolute terms currently looks quite high.
We can see that, Canada Goose Holdings currently has an ROCE of 22% compared to its ROCE 3 years ago, which was 6.6%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Canada Goose Holdings's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. 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 Canada Goose Holdings.
Do Canada Goose Holdings'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. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Canada Goose Holdings has total liabilities of CA$140m and total assets of CA$996m. As a result, its current liabilities are equal to approximately 14% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.
What We Can Learn From Canada Goose Holdings's ROCE
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.