Want to help shape the future of investing tools? Participate in a short research study and receive a 6-month subscription to the award winning Simply Wall St research tool (valued at $60)!
Today we’ll look at Hibbett Sports, Inc. (NASDAQ:HIBB) and reflect on its potential as an investment. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
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. 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.’
How Do You Calculate Return On Capital Employed?
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 Hibbett Sports:
0.13 = US$58m ÷ (US$510m – US$156m) (Based on the trailing twelve months to November 2018.)
Therefore, Hibbett Sports has an ROCE of 13%.
Does Hibbett Sports Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, Hibbett Sports’s ROCE appears to be around the 13% average of the Specialty Retail industry. Separate from Hibbett Sports’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Hibbett Sports’s current ROCE of 13% is lower than its ROCE in the past, which was 35%, 3 years ago. Therefore we wonder if the company is facing new headwinds.
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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Hibbett Sports.
What Are Current Liabilities, And How Do They Affect Hibbett Sports’s 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Hibbett Sports has total liabilities of US$156m and total assets of US$510m. Therefore its current liabilities are equivalent to approximately 31% of its total assets. With this level of current liabilities, Hibbett Sports’s ROCE is boosted somewhat.
What We Can Learn From Hibbett Sports’s ROCE
Hibbett Sports’s ROCE does look good, but the level of current liabilities also contribute to that. But note: Hibbett Sports may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
I will like Hibbett Sports better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.