Today we’ll evaluate Dillard’s, Inc. (NYSE:DDS) to determine whether it could have potential as an investment idea. 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. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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?
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 Dillard’s:
0.11 = US$271m ÷ (US$4.0b – US$1.5b) (Based on the trailing twelve months to November 2018.)
Therefore, Dillard’s has an ROCE of 11%.
Does Dillard’s Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Dillard’s’s ROCE appears to be significantly below the 16% average in the Multiline Retail industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from Dillard’s’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
As we can see, Dillard’s currently has an ROCE of 11%, less than the 17% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Dillard’s.
What Are Current Liabilities, And How Do They Affect Dillard’s’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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Dillard’s has total liabilities of US$1.5b and total assets of US$4.0b. As a result, its current liabilities are equal to approximately 38% of its total assets. With this level of current liabilities, Dillard’s’s ROCE is boosted somewhat.
The Bottom Line On Dillard’s’s ROCE
Dillard’s’s ROCE does look good, but the level of current liabilities also contribute to that. But note: Dillard’s 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).
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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 email@example.com.