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Zale Corp (NYSE:ZLC)
Return on Capital (Joel Greenblatt)
42.25% (As of Jan. 2014)

Joel Greenblatt defined Return on Capital differently in his book The Little Book That Still Beats the Market (Little Books. Big Profits). He defines Return on Capital as EBIT divided by the total of net fixed assets and net working capital. Zale Corp's annualized return on capital (Joel Greenblatt) for the quarter that ended in Jan. 2014 was 42.25%.

Zale Corp's 5-Year average Growth Rate of Return on Capital (Joel Greenblatt) was 0.00% per year.

Definition

Joel Greenblatt defined Return on Capital differently in his book The Little Book That Still Beats the Market (Little Books. Big Profits) . He defines Return on Capital as follows:

 Return on Capital = EBIT / Average of (Net fixed Assets + Net Working Capital)

EBIT stands for Earnings Before Interest and Taxes.

Fixed Assets are also known as non-current assets. They include the property, plant, and equipment that the firm needs in its operation.

GuruFocus calculates net working capital as: (Accounts Receivable + Inventory + Other Current Assets) - (Accounts Payable + Deferred Revenue + Other Current Liabilities). We're trying to account for OPERATING assets and liabilities (part of daily business) when calculating working capital. Cash and marketable securities are considered NON-OPERATING assets and are not included in calculation. We will also back out all interest bearing debt, short term debt and the portion of long term debt that is due in the current period from the current liabilities. This debt will be considered when computing cost of capital and it would be inappropriate to count it twice.

 Working Capital (Q: Oct. 2013 ) = (Accts Rec. + Inventory + Other Curr. Ass.) - (Accts Pay. + Defer. Rev. + Other Curr. Liab.) = (0 + 903.282 + 52.163) - (297.104 + 186.549 + 2.84217094304E-14) = 471.792

 Working Capital (Q: Jan. 2014 ) = (Accts Rec. + Inventory + Other Curr. Ass.) - (Accts Pay. + Defer. Rev. + Other Curr. Liab.) = (0 + 864.275 + 48.26) - (276.907 + 189.146 + 2.84217094304E-14) = 446.482

When net working capital is negative, 0 is used.

So Joel Greenblatts Return on Capital of Zale Corp for the quarter that ended in Jan. 2014 can be restated as:

 ROC (Joel Greenblatts) (Q: Jan. 2014 ) = EBIT / Average of (Net fixed Assets + Net Working Capital) = EBIT / Average of (Net PPE + Net Working Capital) Q: Oct. 2013 Q: Jan. 2014 = EBIT / ( ( (Net PPE + Net Working Capital) + (Net PPE + Net Working Capital) ) / 2 ) = 238.088 / ( ( (105.089 + max(471.792, 0)) + (103.714 + max(446.482, 0)) ) / 2 ) = 238.088 / ( ( 576.881 + 550.196 ) / 2 ) = 238.088 / 563.5385 = 42.25 %

Note: The Earnings Before Interest and Taxes (EBIT) data used here is four times the quarterly (Jan. 2014) EBIT data.

* All numbers are in millions except for per share data and ratio. All numbers are in their own currency.

Explanation

The way Joel Greenblatt defines Return on Capital is a more accurate measure of how efficiently the company generates returns onthe capital actually invested in the business. EBIT is used instead of net income because the tax and interest payment may be affected by factors other than the core business operation. Intangible assets are not included in the calculation because they dont need to be replaced.

Joel Greenblatt uses his definition of Return on Capital and Earnings Yield (Joel Greenblatt) to rank companies.

Related Terms

Historical Data

* All numbers are in millions except for per share data and ratio. All numbers are in their own currency.

Zale Corp Annual Data

 Jul04 Jul05 Jul06 Jul07 Jul08 Jul09 Jul10 Jul11 Jul12 Jul13 ROC_JOEL 22.76 22.17 9.52 10.57 1.57 -29.98 -17.92 -5.32 3.71 6.74

Zale Corp Quarterly Data

 Oct11 Jan12 Apr12 Jul12 Oct12 Jan13 Apr13 Jul13 Oct13 Jan14 ROC_JOEL -16.75 31.44 4.64 -5.88 -16.83 36.35 7.17 -2.30 -16.08 42.25
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