Today we’ll evaluate WD-40 Company (NASDAQ:WDFC) to determine whether it could have potential as an investment idea. 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 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.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. 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 WD-40:
0.33 = US$77m ÷ (US$317m – US$86m) (Based on the trailing twelve months to August 2018.)
So, WD-40 has an ROCE of 33%.
Is WD-40’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. WD-40’s ROCE appears to be substantially greater than the 15% average in the Household Products industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, WD-40’s ROCE currently appears to be excellent.
Our data shows that WD-40 currently has an ROCE of 33%, compared to its ROCE of 22% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for WD-40.
How WD-40’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 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.
WD-40 has total assets of US$317m and current liabilities of US$86m. Therefore its current liabilities are equivalent to approximately 27% of its total assets.
The Bottom Line On WD-40’s ROCE
A minimal amount of current liabilities limits the impact on ROCE. With low current liabilities and a high ROCE, WD-40 could be worthy of further investigation. We like to see a high ROCE, but it’s not the only data point we check. For example you might check if insiders are buying shares.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies.
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.