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Why Raven Industries, Inc.’s (NASDAQ:RAVN) Return On Capital Employed Looks Uninspiring

Simply Wall St
·4 mins read

Today we'll look at Raven Industries, Inc. (NASDAQ:RAVN) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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 Raven Industries:

0.11 = US$39m ÷ (US$403m - US$38m) (Based on the trailing twelve months to January 2020.)

So, Raven Industries has an ROCE of 11%.

See our latest analysis for Raven Industries

Is Raven Industries's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. We can see Raven Industries's ROCE is meaningfully below the Industrials industry average of 14%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of where Raven Industries sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

You can see in the image below how Raven Industries's ROCE compares to its industry. Click to see more on past growth.

NasdaqGS:RAVN Past Revenue and Net Income April 24th 2020
NasdaqGS:RAVN Past Revenue and Net Income April 24th 2020

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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 Raven Industries.

How Raven Industries's Current Liabilities Impact Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Raven Industries has total assets of US$403m and current liabilities of US$38m. As a result, its current liabilities are equal to approximately 9.4% of its total assets. With low current liabilities, Raven Industries's decent ROCE looks that much more respectable.

The Bottom Line On Raven Industries's ROCE

If it is able to keep this up, Raven Industries could be attractive. Raven Industries shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of growing companies that insiders are buying.

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.

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.