Do You Know About The Scotts Miracle-Gro Company’s (NYSE:SMG) ROCE?

Today we’ll look at The Scotts Miracle-Gro Company (NYSE:SMG) and reflect on its potential as an investment. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

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. 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’.

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 Scotts Miracle-Gro:

0.13 = US$352m ÷ (US$3.2b – US$595m) (Based on the trailing twelve months to December 2018.)

So, Scotts Miracle-Gro has an ROCE of 13%.

Check out our latest analysis for Scotts Miracle-Gro

Does Scotts Miracle-Gro Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. It appears that Scotts Miracle-Gro’s ROCE is fairly close to the Chemicals industry average of 12%. Regardless of where Scotts Miracle-Gro sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

How Scotts Miracle-Gro’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 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Scotts Miracle-Gro has total liabilities of US$595m and total assets of US$3.2b. As a result, its current liabilities are equal to approximately 18% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

What We Can Learn From Scotts Miracle-Gro’s ROCE

This is good to see, and with a sound ROCE, Scotts Miracle-Gro could be worth a closer look. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

I will like Scotts Miracle-Gro better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.