Why We Like Crown Crafts, Inc.’s (NASDAQ:CRWS) 16% Return On Capital Employed
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Today we'll look at Crown Crafts, Inc. (NASDAQ:CRWS) and reflect on its potential as an investment. 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. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting 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. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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?
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 Crown Crafts:
0.16 = US$7.4m ÷ (US$55m - US$7.7m) (Based on the trailing twelve months to March 2019.)
Therefore, Crown Crafts has an ROCE of 16%.
See our latest analysis for Crown Crafts
Is Crown Crafts's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Crown Crafts's ROCE is meaningfully better than the 12% average in the Luxury industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Crown Crafts compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
We can see that , Crown Crafts currently has an ROCE of 16%, less than the 28% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Crown Crafts's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 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 Crown Crafts.
How Crown Crafts's Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Crown Crafts has total liabilities of US$7.7m and total assets of US$55m. As a result, its current liabilities are equal to approximately 14% of its total assets. Low current liabilities are not boosting the ROCE too much.
The Bottom Line On Crown Crafts's ROCE
With that in mind, Crown Crafts's ROCE appears pretty good. There might be better investments than Crown Crafts out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
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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.
