Today we are going to look at Walgreens Boots Alliance, Inc. (NASDAQ:WBA) 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 of all, we’ll work out how to calculate ROCE. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect 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, ROCE 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?
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 Walgreens Boots Alliance:
0.14 = US$6.4b ÷ (US$68b – US$22b) (Based on the trailing twelve months to August 2018.)
Therefore, Walgreens Boots Alliance has an ROCE of 14%.
Check out our latest analysis for Walgreens Boots Alliance
Is Walgreens Boots Alliance’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Walgreens Boots Alliance’s ROCE appears to be substantially greater than the 9.6% average in the Consumer Retailing 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. Independently of how Walgreens Boots Alliance compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
As we can see, Walgreens Boots Alliance currently has an ROCE of 14% compared to its ROCE 3 years ago, which was 10.0%. This makes us think about whether the company has been reinvesting shrewdly.
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 only a point-in-time measure. You can see analyst predictions in our free report on analyst forecasts for the company.
Walgreens Boots Alliance’s Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) unfairly boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
Walgreens Boots Alliance has total liabilities of US$22b and total assets of US$68b. As a result, its current liabilities are equal to approximately 32% of its total assets. Walgreens Boots Alliance has a middling amount of current liabilities, increasing its ROCE somewhat.
The Bottom Line On Walgreens Boots Alliance’s ROCE
With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. While the ROCE is useful information, it is not always predictive. We need to do more work before making a decision. One data point to check is if insiders have bought shares recently.
But note: Walgreens Boots Alliance may not be the best stock to buy. So take a peek at this free list of interesting companies with high ROE and low debt.
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.