I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in The Buckle Inc (NYSE:BKE).
If you purchase a BKE share you are effectively becoming a partner with many other shareholders. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. Your return is tied to BKE’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. Therefore, looking at how efficiently Buckle is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
Buckle’s Return On Capital Employed
You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Buckle is good at growing investor capital. I have calculated Buckle’s ROCE for you below:
ROCE Calculation for BKE
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$141m ÷ (US$545m – US$93m) = 31%
The calculation above shows that BKE’s earnings were 31% of capital employed. This makes Buckle exceptionally profitable when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future and is able to either provide solid dividends or reinvestment opportunities, your capital will enlarge at a rapid rate over time.
Not so fast
Buckle’s relatively strong ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Buckle is in a favourable position, but this can change if these factors underperform. Because of this, it is important to look beyond the final value of BKE’s ROCE and understand what is happening to the individual components. If you go back three years, you’ll find that BKE’s ROCE has decreased from 55%. In this time, earnings have fallen from US$252m to US$141m and capital employed declined as well albeit by a relatively smaller amount, signifying ROCE decreased as a result of a greater fall in earnings compared to the business’ use of capital.
Although Buckle’s ROCE has decreased over the past few years, the company still remains an attractive candidate that is capable of producing solid capital returns and a potentially strong 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. If you don’t pay attention to these factors you cannot be sure if the downward path is a signal to run, or just a blip in an otherwise solid return profile. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for BKE’s future growth? Take a look at our free research report of analyst consensus for BKE’s outlook.
- Valuation: What is BKE worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether BKE is currently mispriced by the market.
- 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 firstname.lastname@example.org.