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Is Johnson Outdoors Inc.’s (NASDAQ:JOUT) Return On Capital Employed Any Good?

Today we'll look at Johnson Outdoors Inc. (NASDAQ:JOUT) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting 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. In brief, it is a useful tool, but it is not without drawbacks. 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'.

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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

Or for Johnson Outdoors:

0.17 = US$60m ÷ (US$446m - US$97m) (Based on the trailing twelve months to June 2019.)

So, Johnson Outdoors has an ROCE of 17%.

See our latest analysis for Johnson Outdoors

Does Johnson Outdoors Have A Good ROCE?

One way to assess ROCE is to compare similar companies. We can see Johnson Outdoors's ROCE is around the 17% average reported by the Leisure industry. Independently of how Johnson Outdoors compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

You can click on the image below to see (in greater detail) how Johnson Outdoors's past growth compares to other companies.

NasdaqGS:JOUT Past Revenue and Net Income, August 8th 2019
NasdaqGS:JOUT Past Revenue and Net Income, August 8th 2019

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Johnson Outdoors.

Johnson Outdoors's Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Johnson Outdoors has total liabilities of US$97m and total assets of US$446m. As a result, its current liabilities are equal to approximately 22% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

What We Can Learn From Johnson Outdoors's ROCE

Overall, Johnson Outdoors has a decent ROCE and could be worthy of further research. Johnson Outdoors 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.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.