What Can We Learn From Sturm, Ruger & Company, Inc.’s (NYSE:RGR) Investment Returns?

Today we’ll look at Sturm, Ruger & Company, Inc. (NYSE:RGR) and reflect on its potential as an investment. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

Firstly, 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 amount of pre-tax profits a company can generate from the 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. 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?

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 Sturm Ruger:

0.17 = US$47m ÷ (US$329m – US$49m) (Based on the trailing twelve months to September 2019.)

Therefore, Sturm Ruger has an ROCE of 17%.

Check out our latest analysis for Sturm Ruger

Is Sturm Ruger’s ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Sturm Ruger’s ROCE appears to be around the 17% average of the Leisure industry. Independently of how Sturm Ruger compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

Sturm Ruger’s current ROCE of 17% is lower than its ROCE in the past, which was 47%, 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Sturm Ruger’s ROCE compares to its industry.

NYSE:RGR Past Revenue and Net Income, December 2nd 2019
NYSE:RGR Past Revenue and Net Income, December 2nd 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. If Sturm Ruger is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Do Sturm Ruger’s Current Liabilities Skew 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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Sturm Ruger has total liabilities of US$49m and total assets of US$329m. Therefore its current liabilities are equivalent to approximately 15% of its total assets. Low current liabilities are not boosting the ROCE too much.

Our Take On Sturm Ruger’s ROCE

With that in mind, Sturm Ruger’s ROCE appears pretty good. There might be better investments than Sturm Ruger out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

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

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.