Yahoo Finance Is JD Sports Fashion plc’s (LON:JD.) 14% ROCE Any Good?
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. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. 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'.
How Do You Calculate Return On Capital Employed?
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 JD Sports Fashion:
0.14 = UK£441m ÷ (UK£4.7b - UK£1.6b) (Based on the trailing twelve months to August 2019.)
Therefore, JD Sports Fashion has an ROCE of 14%.
View our latest analysis for JD Sports Fashion
Does JD Sports Fashion Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, JD Sports Fashion's ROCE is meaningfully higher than the 8.6% average in the Specialty Retail industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from JD Sports Fashion's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
JD Sports Fashion's current ROCE of 14% is lower than 3 years ago, when the company reported a 38% ROCE. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how JD Sports Fashion's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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.
JD Sports Fashion's Current Liabilities And Their Impact On 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 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 counter this, investors can check if a company has high current liabilities relative to total assets.
JD Sports Fashion has total assets of UK£4.7b and current liabilities of UK£1.6b. As a result, its current liabilities are equal to approximately 34% of its total assets. JD Sports Fashion has a middling amount of current liabilities, increasing its ROCE somewhat.
What We Can Learn From JD Sports Fashion's ROCE
With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. JD Sports Fashion 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.
I will like JD Sports Fashion 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 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.
