Here’s why Stanley Black & Decker, Inc.’s (NYSE:SWK) Returns On Capital Matters So Much

Today we are going to look at Stanley Black & Decker, Inc. (NYSE:SWK) 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. 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 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. Ultimately, it is a useful but imperfect metric. 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?

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 Stanley Black & Decker:

0.12 = US$1.6b ÷ (US$20b – US$6.1b) (Based on the trailing twelve months to September 2018.)

So, Stanley Black & Decker has an ROCE of 12%.

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Is Stanley Black & Decker’s ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, Stanley Black & Decker’s ROCE appears to be around the 12% average of the Machinery industry. Regardless of where Stanley Black & Decker sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

NYSE:SWK Last Perf January 18th 19
NYSE:SWK Last Perf January 18th 19

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Stanley Black & Decker’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. 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.

Stanley Black & Decker has total assets of US$20b and current liabilities of US$6.1b. Therefore its current liabilities are equivalent to approximately 30% of its total assets. Low current liabilities are not boosting the ROCE too much.

What We Can Learn From Stanley Black & Decker’s ROCE

With that in mind, Stanley Black & Decker’s ROCE appears pretty good. Of course you might be able to find a better stock than Stanley Black & Decker. So you may wish to see this free collection of other companies that have grown earnings strongly.

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

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.