What Can We Make Of Walmart Inc.’s (NYSE:WMT) High Return On Capital?

By
Simply Wall St
Published
May 14, 2020
NYSE:WMT

Today we are going to look at Walmart Inc. (NYSE:WMT) 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, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Overall, it 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.

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 Walmart:

0.14 = US$21b ÷ (US$236b - US$78b) (Based on the trailing twelve months to January 2020.)

So, Walmart has an ROCE of 14%.

See our latest analysis for Walmart

Is Walmart's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Walmart's ROCE is meaningfully higher than the 7.3% average in the Consumer Retailing industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Walmart sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

The image below shows how Walmart's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NYSE:WMT Past Revenue and Net Income May 14th 2020
NYSE:WMT Past Revenue and Net Income May 14th 2020

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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 Walmart.

How Walmart's Current Liabilities Impact Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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.

Walmart has current liabilities of US$78b and total assets of US$236b. As a result, its current liabilities are equal to approximately 33% of its total assets. Walmart has a medium level of current liabilities, which would boost the ROCE.

The Bottom Line On Walmart's ROCE

Walmart's ROCE does look good, but the level of current liabilities also contribute to that. Walmart looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.

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. Thank you for reading.

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