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Why You Should Care About Edgewell Personal Care Company’s (NYSE:EPC) Low Return On Capital

Simply Wall St

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Today we are going to look at Edgewell Personal Care Company (NYSE:EPC) 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. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. 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?

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 Edgewell Personal Care:

0.09 = US$313m ÷ (US$4.0b - US$509m) (Based on the trailing twelve months to March 2019.)

Therefore, Edgewell Personal Care has an ROCE of 9.0%.

View our latest analysis for Edgewell Personal Care

Does Edgewell Personal Care Have A Good ROCE?

One way to assess ROCE is to compare similar companies. In this analysis, Edgewell Personal Care's ROCE appears meaningfully below the 19% average reported by the Personal Products industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, Edgewell Personal Care's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

In our analysis, Edgewell Personal Care's ROCE appears to be 9.0%, compared to 3 years ago, when its ROCE was 6.8%. This makes us wonder if the company is improving.

NYSE:EPC Past Revenue and Net Income, June 26th 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Edgewell Personal Care.

How Edgewell Personal Care's Current Liabilities Impact 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Edgewell Personal Care has total assets of US$4.0b and current liabilities of US$509m. As a result, its current liabilities are equal to approximately 13% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

The Bottom Line On Edgewell Personal Care's ROCE

If Edgewell Personal Care continues to earn an uninspiring ROCE, there may be better places to invest. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.