In This Article:
Today we are going to look at Dorman Products, Inc. (NASDAQ:DORM) 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.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from 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.
So, How Do We Calculate ROCE?
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 Dorman Products:
0.20 = US$161m ÷ (US$1.0b - US$214m) (Based on the trailing twelve months to June 2019.)
Therefore, Dorman Products has an ROCE of 20%.
Check out our latest analysis for Dorman Products
Does Dorman Products Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Dorman Products's ROCE is meaningfully higher than the 15% average in the Auto Components industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Dorman Products compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Dorman Products's current ROCE of 20% is lower than 3 years ago, when the company reported a 28% ROCE. This makes us wonder if the business is facing new challenges. The image below shows how Dorman Products's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Dorman Products's ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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.