Yahoo Finance Are Shoe Zone plc’s (LON:SHOE) High Returns Really That Great?
Today we are going to look at Shoe Zone plc (LON:SHOE) to see whether it might be an attractive investment prospect. 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. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding 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. 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 Shoe Zone:
0.29 = UK£11m ÷ (UK£62m - UK£22m) (Based on the trailing twelve months to March 2019.)
Therefore, Shoe Zone has an ROCE of 29%.
See our latest analysis for Shoe Zone
Is Shoe Zone's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Shoe Zone's ROCE appears to be substantially greater than the 14% average in the Specialty Retail industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Setting aside the comparison to its industry for a moment, Shoe Zone's ROCE in absolute terms currently looks quite high.
The image below shows how Shoe Zone's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Shoe Zone.
Shoe Zone's Current Liabilities And Their Impact On Its 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Shoe Zone has total liabilities of UK£22m and total assets of UK£62m. Therefore its current liabilities are equivalent to approximately 36% of its total assets. A medium level of current liabilities boosts Shoe Zone's ROCE somewhat.
The Bottom Line On Shoe Zone's ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. Shoe Zone 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.
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.
