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Are YETI Holdings, Inc.’s (NYSE:YETI) High Returns Really That Great?

Simply Wall St

Today we'll look at YETI Holdings, Inc. (NYSE:YETI) 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding 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. Overall, it is a valuable metric that has its flaws. 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 YETI Holdings:

0.34 = US$123m ÷ (US$560m - US$201m) (Based on the trailing twelve months to September 2019.)

Therefore, YETI Holdings has an ROCE of 34%.

View our latest analysis for YETI Holdings

Is YETI Holdings's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that YETI Holdings's ROCE is meaningfully better than the 17% average in the Leisure industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, YETI Holdings's ROCE currently appears to be excellent.

YETI Holdings's current ROCE of 34% is lower than 3 years ago, when the company reported a 52% ROCE. Therefore we wonder if the company is facing new headwinds. The image below shows how YETI Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NYSE:YETI Past Revenue and Net Income, January 9th 2020

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 YETI Holdings.

How YETI Holdings's Current Liabilities Impact 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 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 counter this, investors can check if a company has high current liabilities relative to total assets.

YETI Holdings has total assets of US$560m and current liabilities of US$201m. Therefore its current liabilities are equivalent to approximately 36% of its total assets. YETI Holdings has a medium level of current liabilities, boosting its ROCE somewhat.

The Bottom Line On YETI Holdings's ROCE

Despite this, it reports a high ROCE, and may be worth investigating further. There might be better investments than YETI Holdings 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.

If you are like me, then you will 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.