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Is The Warehouse Group Limited’s (NZSE:WHS) 22% ROCE Any Good?

Today we'll evaluate The Warehouse Group Limited (NZSE:WHS) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Return On Capital Employed (ROCE): What is it?

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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

So, How Do We Calculate ROCE?

Analysts use this formula to calculate return on capital employed:

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Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Warehouse Group:

0.22 = NZ$114m ÷ (NZ$1.1b - NZ$540m) (Based on the trailing twelve months to July 2019.)

So, Warehouse Group has an ROCE of 22%.

View our latest analysis for Warehouse Group

Is Warehouse Group's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Warehouse Group's ROCE is meaningfully better than the 7.8% average in the Multiline Retail industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Warehouse Group's ROCE currently appears to be excellent.

Our data shows that Warehouse Group currently has an ROCE of 22%, compared to its ROCE of 15% 3 years ago. This makes us think the business might be improving. You can see in the image below how Warehouse Group's ROCE compares to its industry. Click to see more on past growth.

NZSE:WHS Past Revenue and Net Income, December 16th 2019
NZSE:WHS Past Revenue and Net Income, December 16th 2019

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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

What Are Current Liabilities, And How Do They Affect Warehouse Group's ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Warehouse Group has total assets of NZ$1.1b and current liabilities of NZ$540m. As a result, its current liabilities are equal to approximately 51% of its total assets. Warehouse Group's high level of current liabilities boost the ROCE - but its ROCE is still impressive.

The Bottom Line On Warehouse Group's ROCE

So to us, the company is potentially worth investigating further. Warehouse Group shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.