How Do Wilhelmina International, Inc.’s (NASDAQ:WHLM) Returns Compare To Its Industry?

Today we’ll evaluate Wilhelmina International, Inc. (NASDAQ:WHLM) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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’.

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 Wilhelmina International:

0.038 = US$1.1m ÷ (US$45m – US$16m) (Based on the trailing twelve months to June 2019.)

So, Wilhelmina International has an ROCE of 3.8%.

Check out our latest analysis for Wilhelmina International

Does Wilhelmina International Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Wilhelmina International’s ROCE appears meaningfully below the 11% average reported by the Commercial Services industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Wilhelmina International’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.

Wilhelmina International’s current ROCE of 3.8% is lower than 3 years ago, when the company reported a 6.0% ROCE. This makes us wonder if the business is facing new challenges.

NasdaqCM:WHLM Past Revenue and Net Income, August 21st 2019
NasdaqCM:WHLM Past Revenue and Net Income, August 21st 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, after all, simply a snap shot of a single year. You can check if Wilhelmina International has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Wilhelmina International’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 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.

Wilhelmina International has total assets of US$45m and current liabilities of US$16m. Therefore its current liabilities are equivalent to approximately 35% of its total assets. With a medium level of current liabilities boosting the ROCE a little, Wilhelmina International’s low ROCE is unappealing.

What We Can Learn From Wilhelmina International’s ROCE

There are likely better investments out there. Of course, you might also be able to find a better stock than Wilhelmina International. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.