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Spin Master Corp. (TSE:TOY) Earns A Nice Return On Capital Employed

Today we’ll evaluate Spin Master Corp. (TSE:TOY) to determine whether it could have potential as an investment idea. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.

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

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. Overall, it is a valuable metric that has its flaws. 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’.

So, How Do We Calculate ROCE?

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 Spin Master:

0.35 = US$229m ÷ (US$1.2b – US$506m) (Based on the trailing twelve months to September 2018.)

So, Spin Master has an ROCE of 35%.

See our latest analysis for Spin Master

Does Spin Master Have A Good ROCE?

One way to assess ROCE is to compare similar companies. In our analysis, Spin Master’s ROCE is meaningfully higher than the 17% average in the Leisure industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Spin Master’s ROCE in absolute terms currently looks quite high.

TSX:TOY Past Revenue and Net Income, March 5th 2019
TSX:TOY Past Revenue and Net Income, March 5th 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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Spin Master.

Do Spin Master’s Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Spin Master has total assets of US$1.2b and current liabilities of US$506m. Therefore its current liabilities are equivalent to approximately 43% of its total assets. Spin Master’s ROCE is boosted somewhat by its middling amount of current liabilities.

What We Can Learn From Spin Master’s ROCE

Even so, it has a great ROCE, and could be an attractive prospect for further research. Of course you might be able to find a better stock than Spin Master. So you may wish to see this free collection of other companies that have grown earnings strongly.

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