Does Shaver Shop Group Limited (ASX:SSG) Create Value For Shareholders?

Today we'll evaluate Shaver Shop Group Limited (ASX:SSG) 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.

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

ROCE measures the amount of pre-tax profits a company can generate from the 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.

How Do You Calculate Return On Capital Employed?

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 Shaver Shop Group:

0.14 = AU$10m ÷ (AU$93m - AU$19m) (Based on the trailing twelve months to June 2019.)

So, Shaver Shop Group has an ROCE of 14%.

View our latest analysis for Shaver Shop Group

Does Shaver Shop Group Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. It appears that Shaver Shop Group's ROCE is fairly close to the Specialty Retail industry average of 16%. Separate from Shaver Shop Group's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

Shaver Shop Group's current ROCE of 14% is lower than 3 years ago, when the company reported a 19% ROCE. Therefore we wonder if the company is facing new headwinds. The image below shows how Shaver Shop Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. 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 Shaver Shop Group.

How Shaver Shop Group's Current Liabilities Impact 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Shaver Shop Group has total liabilities of AU$19m and total assets of AU$93m. As a result, its current liabilities are equal to approximately 21% of its total assets. Low current liabilities are not boosting the ROCE too much.

The Bottom Line On Shaver Shop Group's ROCE

This is good to see, and with a sound ROCE, Shaver Shop Group could be worth a closer look. There might be better investments than Shaver Shop Group out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

I will like Shaver Shop Group better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.