Why We Like boohoo group plc’s (LON:BOO) 24% Return On Capital Employed

Today we are going to look at boohoo group plc (LON:BOO) to see whether it might be an attractive investment prospect. 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 up, we’ll look at what ROCE is and how we calculate it. 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. In general, businesses with a higher ROCE are usually better quality. 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?

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 boohoo group:

0.24 = UK£65m ÷ (UK£440m – UK£162m) (Based on the trailing twelve months to February 2019.)

Therefore, boohoo group has an ROCE of 24%.

View our latest analysis for boohoo group

Does boohoo group Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. In our analysis, boohoo group’s ROCE is meaningfully higher than the 19% average in the Online 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, boohoo group’s ROCE in absolute terms currently looks quite high.

AIM:BOO Past Revenue and Net Income, September 15th 2019
AIM:BOO Past Revenue and Net Income, September 15th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for boohoo group.

How boohoo group’s Current Liabilities Impact Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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.

boohoo group has total assets of UK£440m and current liabilities of UK£162m. As a result, its current liabilities are equal to approximately 37% of its total assets. boohoo group has a medium level of current liabilities, boosting its ROCE somewhat.

What We Can Learn From boohoo group’s ROCE

Still, it has a high ROCE, and may be an interesting prospect for further research. boohoo group 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.

boohoo group is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider 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.