Yahoo Finance JD Sports Fashion plc (LON:JD.) Earns A Nice Return On Capital Employed
Today we'll look at JD Sports Fashion plc (LON:JD.) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting 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. In general, businesses with a higher ROCE are usually better quality. 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 JD Sports Fashion:
0.28 = UK£365m ÷ (UK£2.2b - UK£901m) (Based on the trailing twelve months to February 2019.)
Therefore, JD Sports Fashion has an ROCE of 28%.
View our latest analysis for JD Sports Fashion
Does JD Sports Fashion Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In our analysis, JD Sports Fashion's ROCE is meaningfully higher than the 13% average in the Specialty Retail industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, JD Sports Fashion's ROCE in absolute terms currently looks quite high.
You can click on the image below to see (in greater detail) how JD Sports Fashion's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during 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 JD Sports Fashion.
How JD Sports Fashion'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 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.
JD Sports Fashion has total liabilities of UK£901m and total assets of UK£2.2b. Therefore its current liabilities are equivalent to approximately 41% of its total assets. JD Sports Fashion's ROCE is boosted somewhat by its middling amount of current liabilities.
The Bottom Line On JD Sports Fashion's ROCE
Despite this, it reports a high ROCE, and may be worth investigating further. JD Sports Fashion looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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.
