Today we are going to look at The Hain Celestial Group, Inc. (NASDAQ:HAIN) to see whether it might be an attractive investment prospect. 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. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the 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. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.
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 Hain Celestial Group:
0.056 = US$158m ÷ (US$2.9b – US$438m) (Based on the trailing twelve months to September 2018.)
So, Hain Celestial Group has an ROCE of 5.6%.
Is Hain Celestial Group’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Hain Celestial Group’s ROCE appears meaningfully below the 8.6% average reported by the Food industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Hain Celestial Group compares to its industry, its ROCE in absolute terms is low; not much better than the ~2.9% available in government bonds. It is likely that there are more attractive prospects out there.
As we can see, Hain Celestial Group currently has an ROCE of 5.6%, less than the 9.9% it reported 3 years ago. This makes us wonder if the business is facing new challenges.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can see analyst predictions in our free report on analyst forecasts for the company.
Hain Celestial Group’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 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.
Hain Celestial Group has total liabilities of US$438m and total assets of US$2.9b. As a result, its current liabilities are equal to approximately 15% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.
The Bottom Line On Hain Celestial Group’s ROCE
Hain Celestial Group has a poor ROCE, and there may be better investment prospects out there. We prefer to see a high ROCE, but even a low quality business can be a good buy at the right price. So it might be wise to check if insiders have been buying.
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.
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 firstname.lastname@example.org.