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Has Samsonite International S.A. (HKG:1910) Been Employing Capital Shrewdly?

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Today we'll evaluate Samsonite International S.A. (HKG:1910) to determine whether it could have potential as an investment idea. 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, 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.

What is Return On Capital Employed (ROCE)?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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:

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Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Samsonite International:

0.091 = US$438m ÷ (US$5.7b - US$940m) (Based on the trailing twelve months to March 2019.)

So, Samsonite International has an ROCE of 9.1%.

View our latest analysis for Samsonite International

Does Samsonite International Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Samsonite International's ROCE appears to be around the 11% average of the Luxury industry. Separate from how Samsonite International stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.

We can see that , Samsonite International currently has an ROCE of 9.1%, less than the 16% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Samsonite International's ROCE compares to its industry. Click to see more on past growth.

SEHK:1910 Past Revenue and Net Income, July 4th 2019
SEHK:1910 Past Revenue and Net Income, July 4th 2019

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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

What Are Current Liabilities, And How Do They Affect Samsonite International's ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

Samsonite International has total assets of US$5.7b and current liabilities of US$940m. As a result, its current liabilities are equal to approximately 16% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

Our Take On Samsonite International's ROCE

That said, Samsonite International's ROCE is mediocre, there may be more attractive investments around. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.