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Looking Into Nike's Return On Capital Employed

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Nike (NYSE: NKE) posted a 310.74% decrease in earnings from Q4. Sales, however, increased by 67.81% over the previous quarter to $10.59 billion. Despite the increase in sales this quarter, the decrease in earnings may suggest Nike is not utilizing their capital as effectively as possible. In Q4, Nike brought in $6.31 billion in sales but lost $838.00 million in earnings.

Why ROCE Is Significant

Return on Capital Employed is a measure of yearly pre-tax profit relative to capital employed by a business. Changes in earnings and sales indicate shifts in a company's ROCE. A higher ROCE is generally representative of successful growth of a company and is a sign of higher earnings per share in the future. A low or negative ROCE suggests the opposite. In Q1, Nike posted an ROCE of 0.19%.

Keep in mind, while ROCE is a good measure of a company's recent performance, it is not a highly reliable predictor of a company's earnings or sales in the near future.

Return on Capital Employed is an important measurement of efficiency and a useful tool when comparing companies that operate in the same industry. A relatively high ROCE indicates a company may be generating profits that can be reinvested into more capital, leading to higher returns and growing EPS for shareholders.

For Nike, the return on capital employed ratio shows the number of assets can actually help the company achieve higher returns, an important note investors will take into account when gauging the payoff from long-term financing strategies.

Q1 Earnings Insight

Nike reported Q1 earnings per share at $0.95/share, which beat analyst predictions of $0.47/share.

 

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