Yahoo Finance Here’s What BJ's Wholesale Club Holdings, Inc.’s (NYSE:BJ) Return On Capital Can Tell Us
Today we are going to look at BJ's Wholesale Club Holdings, Inc. (NYSE:BJ) to see whether it might be an attractive investment prospect. 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 of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for BJ's Wholesale Club Holdings:
0.10 = US$364m ÷ (US$5.2b - US$1.7b) (Based on the trailing twelve months to May 2019.)
Therefore, BJ's Wholesale Club Holdings has an ROCE of 10%.
View our latest analysis for BJ's Wholesale Club Holdings
Is BJ's Wholesale Club Holdings's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, BJ's Wholesale Club Holdings's ROCE appears to be around the 9.9% average of the Consumer Retailing industry. Separate from how BJ's Wholesale Club Holdings stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
The image below shows how BJ's Wholesale Club Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do BJ's Wholesale Club Holdings's Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
BJ's Wholesale Club Holdings has total assets of US$5.2b and current liabilities of US$1.7b. Therefore its current liabilities are equivalent to approximately 32% of its total assets. BJ's Wholesale Club Holdings's ROCE is improved somewhat by its moderate amount of current liabilities.
Our Take On BJ's Wholesale Club Holdings's ROCE
With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. You might be able to find a better investment than BJ's Wholesale Club Holdings. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
I will like BJ's Wholesale Club Holdings better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
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. Thank you for reading.
