Today we’ll evaluate G-III Apparel Group, Ltd. (NASDAQ:GIII) to determine whether it could have potential as an investment idea. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First of all, we’ll work out how to calculate ROCE. Next, we’ll compare it to others in its industry. Then we’ll determine how its current liabilities are affecting 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 the end, ROCE is a valuable metric that has its flaws. 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 G-III Apparel Group:
0.11 = US$163m ÷ (US$2.6b – US$623m) (Based on the trailing twelve months to October 2018.)
So, G-III Apparel Group has an ROCE of 11%.
Does G-III Apparel Group Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. It appears that G-III Apparel Group’s ROCE is fairly close to the Luxury industry average of 14%. Independently of how G-III Apparel Group compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
As we can see, G-III Apparel Group currently has an ROCE of 11%, less than the 22% it reported 3 years ago. This makes us wonder if the business is facing new challenges.
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. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for G-III Apparel Group.
How G-III Apparel Group’s Current Liabilities Impact 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.
G-III Apparel Group has total assets of US$2.6b and current liabilities of US$623m. As a result, its current liabilities are equal to approximately 24% of its total assets. Low current liabilities are not boosting the ROCE too much.
What We Can Learn From G-III Apparel Group’s ROCE
With that in mind, G-III Apparel Group’s ROCE appears pretty good. A good or bad ROCE tells us something about a business, but we need to do more research before making a purchase. One data point to check is if insiders have bought shares recently.
If you would prefer check out another company — one with potentially superior financials — then do not miss this free list of interesting companies, that have HIGH return on equity and low debt.
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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 email@example.com.