Is Johnson Outdoors Inc.’s (NASDAQ:JOUT) 17% Return On Capital Employed Good News?

Today we’ll look at Johnson Outdoors Inc. (NASDAQ:JOUT) and reflect on its potential as an investment. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First of all, we’ll work out how to 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. In general, businesses with a higher ROCE are usually better quality. 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 Johnson Outdoors:

0.17 = US$60m ÷ (US$446m – US$97m) (Based on the trailing twelve months to June 2019.)

Therefore, Johnson Outdoors has an ROCE of 17%.

See our latest analysis for Johnson Outdoors

Does Johnson Outdoors Have A Good ROCE?

One way to assess ROCE is to compare similar companies. It appears that Johnson Outdoors’s ROCE is fairly close to the Leisure industry average of 17%. Regardless of where Johnson Outdoors sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

NasdaqGS:JOUT Past Revenue and Net Income, August 22nd 2019
NasdaqGS:JOUT Past Revenue and Net Income, August 22nd 2019

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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Johnson Outdoors.

What Are Current Liabilities, And How Do They Affect Johnson Outdoors’s 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Johnson Outdoors has total liabilities of US$97m and total assets of US$446m. As a result, its current liabilities are equal to approximately 22% of its total assets. Low current liabilities are not boosting the ROCE too much.

Our Take On Johnson Outdoors’s ROCE

This is good to see, and with a sound ROCE, Johnson Outdoors could be worth a closer look. Johnson Outdoors shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

I will like Johnson Outdoors better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, 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.