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Evaluating Stanley Black & Decker, Inc.’s (NYSE:SWK) Investments In Its Business

Today we'll look at Stanley Black & Decker, Inc. (NYSE:SWK) and reflect on its potential as an investment. 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.

Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from 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. 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?

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 Stanley Black & Decker:

0.10 = US$1.7b ÷ (US$21b - US$4.4b) (Based on the trailing twelve months to December 2019.)

So, Stanley Black & Decker has an ROCE of 10%.

See our latest analysis for Stanley Black & Decker

Is Stanley Black & Decker's ROCE Good?

One way to assess ROCE is to compare similar companies. It appears that Stanley Black & Decker's ROCE is fairly close to the Machinery industry average of 11%. Separate from Stanley Black & Decker's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

The image below shows how Stanley Black & Decker's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NYSE:SWK Past Revenue and Net Income, February 26th 2020
NYSE:SWK Past Revenue and Net Income, February 26th 2020

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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Stanley Black & Decker.

Do Stanley Black & Decker's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Stanley Black & Decker has current liabilities of US$4.4b and total assets of US$21b. Therefore its current liabilities are equivalent to approximately 21% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

What We Can Learn From Stanley Black & Decker's ROCE

With that in mind, Stanley Black & Decker's ROCE appears pretty good. There might be better investments than Stanley Black & Decker 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.

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