Should You Worry About Wilhelmina International, Inc.’s (NASDAQ:WHLM) ROCE?

Today we’ll look at Wilhelmina International, Inc. (NASDAQ:WHLM) and reflect on its potential as an investment. 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. Then we’ll compare its ROCE to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

What is 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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’

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 Wilhelmina International:

0.019 = -US$299.0k ÷ (US$44m – US$15m) (Based on the trailing twelve months to September 2018.)

So, Wilhelmina International has an ROCE of 1.9%.

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Does Wilhelmina International Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Wilhelmina International’s ROCE appears to be significantly below the 11% average in the Commercial Services industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Wilhelmina International stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.

Wilhelmina International’s current ROCE of 1.9% is lower than its ROCE in the past, which was 10%, 3 years ago. This makes us wonder if the business is facing new challenges.

NasdaqCM:WHLM Last Perf January 16th 19
NasdaqCM:WHLM Last Perf January 16th 19

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. If Wilhelmina International is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Wilhelmina International’s Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Wilhelmina International has total liabilities of US$15m and total assets of US$44m. Therefore its current liabilities are equivalent to approximately 34% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, Wilhelmina International’s ROCE is concerning.

Our Take On Wilhelmina International’s ROCE

So researching other companies may be a better use of your time. Of course you might 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.

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.