Yahoo Finance How Good Is World Wrestling Entertainment, Inc. (NYSE:WWE) At Creating Shareholder Value?
Today we'll look at World Wrestling Entertainment, Inc. (NYSE:WWE) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect 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. Ultimately, it is a useful but imperfect metric. 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?
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 World Wrestling Entertainment:
0.11 = US$74m ÷ (US$1.0b - US$358m) (Based on the trailing twelve months to September 2019.)
Therefore, World Wrestling Entertainment has an ROCE of 11%.
View our latest analysis for World Wrestling Entertainment
Does World Wrestling Entertainment Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, World Wrestling Entertainment's ROCE appears to be around the 9.5% average of the Entertainment industry. Separate from World Wrestling Entertainment's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
World Wrestling Entertainment's current ROCE of 11% is lower than its ROCE in the past, which was 16%, 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how World Wrestling Entertainment's ROCE compares to its industry. Click to see more on past growth.
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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for World Wrestling Entertainment.
Do World Wrestling Entertainment's Current Liabilities Skew 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. 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.
World Wrestling Entertainment has total assets of US$1.0b and current liabilities of US$358m. As a result, its current liabilities are equal to approximately 35% of its total assets. With this level of current liabilities, World Wrestling Entertainment's ROCE is boosted somewhat.
What We Can Learn From World Wrestling Entertainment's ROCE
With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. There might be better investments than World Wrestling Entertainment 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.
