Today we’ll evaluate Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) 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 of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Ollie’s Bargain Outlet Holdings:
0.13 = US$166m ÷ (US$1.5b – US$212m) (Based on the trailing twelve months to May 2019.)
So, Ollie’s Bargain Outlet Holdings has an ROCE of 13%.
Does Ollie’s Bargain Outlet Holdings Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, Ollie’s Bargain Outlet Holdings’s ROCE appears to be around the 12% average of the Multiline Retail industry. Regardless of where Ollie’s Bargain Outlet Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
We can see that , Ollie’s Bargain Outlet Holdings currently has an ROCE of 13% compared to its ROCE 3 years ago, which was 9.8%. This makes us wonder if the company is improving.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Ollie’s Bargain Outlet Holdings’s Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
Ollie’s Bargain Outlet Holdings has total assets of US$1.5b and current liabilities of US$212m. As a result, its current liabilities are equal to approximately 14% of its total assets. Low current liabilities are not boosting the ROCE too much.
What We Can Learn From Ollie’s Bargain Outlet Holdings’s ROCE
With that in mind, Ollie’s Bargain Outlet Holdings’s ROCE appears pretty good. There might be better investments than Ollie’s Bargain Outlet Holdings out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Thank you for reading.