What Should You Know About Hibbett Sports Inc’s (NASDAQ:HIBB) Capital Returns?

I am writing today to help inform people who are new to the stock market and want a simplistic look at the return on Hibbett Sports Inc (NASDAQ:HIBB) stock.

Buying Hibbett Sports makes you a partial owner of the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. Your return is tied to HIBB’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Thus, to understand how your money can grow by investing in Hibbett Sports, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).

View our latest analysis for Hibbett Sports

ROCE: Explanation and Calculation

When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. We’ll look at Hibbett Sports’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. HIBB’s ROCE is calculated below:

ROCE Calculation for HIBB

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = US$51.81m ÷ (US$475.25m – US$107.25m) = 14.08%

As you can see, HIBB earned $14.1 from every $100 you invested over the previous twelve months. A good ROCE hurdle you should aim for in your investments is 15%, which HIBB has just fallen short of, meaning the company creates an unideal amount of earnings from capital employed.

NasdaqGS:HIBB Last Perf August 16th 18
NasdaqGS:HIBB Last Perf August 16th 18

Why is this the case?

Although Hibbett Sports is in an unfavourable position, you should know that this could change if the company is able to increase earnings on the same capital base or find new efficiencies that require less capital to produce earnings. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. If you go back three years, you’ll find that HIBB’s ROCE has decreased from 31.19%. The movement in the earnings variable over this time shows a fall from US$116.00m to US$51.81m whilst capital employed also decreased but to a smaller extent, which means the company’s ROCE has deteriorated due to a decline in earnings relative to the capital invested in the business.

Next Steps

Hibbett Sports’s ROCE has decreased in the recent past and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and valuation. Hibbett Sports’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.

  1. Future Outlook: What are well-informed industry analysts predicting for HIBB’s future growth? Take a look at our free research report of analyst consensus for HIBB’s outlook.
  2. Valuation: What is HIBB worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether HIBB is currently undervalued by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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.