Why Outdoorzy S.A.’s (WSE:OUT) Return On Capital Employed Is Impressive

Today we'll evaluate Outdoorzy S.A. (WSE:OUT) 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.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect 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. 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'.

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 Outdoorzy:

0.19 = zł336k ÷ (zł3.2m - zł1.4m) (Based on the trailing twelve months to October 2019.)

So, Outdoorzy has an ROCE of 19%.

See our latest analysis for Outdoorzy

Is Outdoorzy's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Outdoorzy's ROCE is meaningfully better than the 8.5% average in the Online Retail industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Outdoorzy sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

We can see that, Outdoorzy currently has an ROCE of 19% compared to its ROCE 3 years ago, which was 7.5%. This makes us wonder if the company is improving. The image below shows how Outdoorzy'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. 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. If Outdoorzy is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Outdoorzy's 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Outdoorzy has current liabilities of zł1.4m and total assets of zł3.2m. As a result, its current liabilities are equal to approximately 44% of its total assets. Outdoorzy has a medium level of current liabilities, which would boost the ROCE.

Our Take On Outdoorzy's ROCE

Outdoorzy's ROCE does look good, but the level of current liabilities also contribute to that. Outdoorzy 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.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.