Has Qurate Retail, Inc. (NASDAQ:QRTE.A) Been Employing Capital Shrewdly?

Today we are going to look at Qurate Retail, Inc. (NASDAQ:QRTE.A) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First, we'll go over how we 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.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. 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?

The formula for calculating the return on capital employed is:

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

Or for Qurate Retail:

0.096 = US$1.4b ÷ (US$18b - US$3.2b) (Based on the trailing twelve months to June 2019.)

Therefore, Qurate Retail has an ROCE of 9.6%.

See our latest analysis for Qurate Retail

Is Qurate Retail's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Qurate Retail's ROCE appears to be around the 8.1% average of the Online Retail industry. Separate from how Qurate Retail stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.

We can see that , Qurate Retail currently has an ROCE of 9.6% compared to its ROCE 3 years ago, which was 6.2%. This makes us wonder if the company is improving. The image below shows how Qurate Retail'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. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Qurate Retail.

How Qurate Retail'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 counter this, investors can check if a company has high current liabilities relative to total assets.

Qurate Retail has total assets of US$18b and current liabilities of US$3.2b. As a result, its current liabilities are equal to approximately 18% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

What We Can Learn From Qurate Retail's ROCE

That said, Qurate Retail's ROCE is mediocre, there may be more attractive investments around. Of course, you might also be able to find a better stock than Qurate Retail. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.