Today we'll look at Deckers Outdoor Corporation (NYSE:DECK) 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.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. 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 is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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. 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 Deckers Outdoor:
0.28 = US$345m ÷ (US$1.7b - US$466m) (Based on the trailing twelve months to September 2019.)
So, Deckers Outdoor has an ROCE of 28%.
Is Deckers Outdoor's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Deckers Outdoor's ROCE is meaningfully higher than the 11% average in the Luxury industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, Deckers Outdoor's ROCE currently appears to be excellent.
Our data shows that Deckers Outdoor currently has an ROCE of 28%, compared to its ROCE of 18% 3 years ago. This makes us wonder if the company is improving. The image below shows how Deckers Outdoor's ROCE compares to its industry, and you can click it to see more detail on its 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, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Deckers Outdoor.
How Deckers Outdoor's Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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.
Deckers Outdoor has total assets of US$1.7b and current liabilities of US$466m. As a result, its current liabilities are equal to approximately 28% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.
Our Take On Deckers Outdoor's ROCE
, There might be better investments than Deckers Outdoor 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.
I will like Deckers Outdoor better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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. Thank you for reading.