Why Crocs, Inc (NASDAQ: CROX) ROE of 0% Doesn’t Tell The Whole Story


Crocs, Inc.’s (NASDAQ: CROX) most recent return on equity was a below average 0.0% in comparison to the Consumer Discretionary sector which returned 9.3%. Though CROX’s performance over the past twelve months is subpar, it’s useful to understand how the company achieved its low ROE. Was it a result of profit margins, operating efficiency or maybe even leverage? Knowing these components may change your views on CROX and its future prospects.

ROE Trends Of CROX

Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. It is calculated as follows:

ROE = Net Income To Common / Average Total Common Equity

ROE is a helpful metric that illustrates how effective the company is at turning the cash put into the business into gains or returns for investors. But it is important to note that ROE can be impacted by management’s financing decisions such as the deployment of leverage.

The return on equity of CROX is shown below.

CROX's ROE Trends Chart

source: finbox.io data explorer – ROE

A promising sign for shareholders, CROX’s return on equity has increased each year since 2015. ROE increased from -28.1% to -13.6% in fiscal year 2016, increased to -2.6% in 2017 and increased again to 0.0% as of LTM Mar’18. So what’s causing the steady improvement?

CROX’s Improving ROE Trends

In addition to the formula previously discussed, there’s actually another way to calculate ROE. It’s often called the DuPont formula and is as follows:

Return on Equity = Net Profit Margin * Asset Turnover * Equity Multiplier

Analyzing changes in these three items over time allows investors to figure out if operating efficiency, asset use efficiency or the use of leverage is what’s causing changes in ROE. Strong companies should have ROE that is increasing because its net profit margin and/or asset turnover is increasing. On the other hand, a company may not be as strong as investors would otherwise think if ROE is increasing from the use of leverage or debt.

So let’s take a closer look at the drivers behind CROX’s returns.

Net Profit Margin

A promising sign for shareholders, CROX’s net profit margin has increased each year since 2015. Margins increased from -9.0% to -3.1% in fiscal year 2016, increased to -0.5% in 2017 and increased again to 0.0% as of LTM Mar’18.

CROX Net Profit Margin Trends

source: data explorer – net profit margin

As a result, the company’s improving margins help explain, at least partially, why ROE is also improving. Now let’s take a look at CROX’s efficiency performance.

Asset Turnover

It appears that asset turnover of CROX has generally been increasing over the last few years. Turnover increased from 1.54x to 1.76x in fiscal year 2016, increased to 1.84x in 2017 and decreased to 1.77x as of LTM Mar’18.

CROX Asset Turnover Trends

source: data explorer – asset turnover

Therefore, the company’s increasing asset turnover ratio helps explain, at least in part, why ROE is also increasing.

Finally, the DuPont constituents that make up CROX’s ROE are shown in the table below. Note that the table also compares CROX to a peer group that includes Wolverine World Wide, Inc.(NYSE: WWW), Deckers Outdoor Corporation (NYSE: DECK), Genesco Inc. (NYSE: GCO) and Nike, Inc. (NYSE: NKE).

CROX ROE Breakdown vs Peers Table - DuPont Analysis

source: finbox.io’s DuPont model

In conclusion, the DuPont analysis has helped us better understand that CROX’s upswing in return on equity is the result of steadily improving net profit margin, an improving asset turnover ratio and increasing leverage. Therefore when looking at the core operations of the business, CROX shareholders have reason to be excited due to the company’s steady improvement profitability along with a general improvement in operational efficiency and increasing leverage.

The DuPont approach is a helpful tool when analyzing how well management is utilizing shareholder capital. However, it doesn’t necessarily tell the whole story. If you have not done so already, I highly recommend that you complete your research on CROX by taking a look at the following:

Valuation Metrics: how much upside do shares of CROX have based on the Ben Graham Formula? Take a look at our Ben Graham Formula data explorer which also compares the company’s upside to its peers.

Risk Metrics: what is CROX’s Altman Z score? It’s a famous formula used to predict the probability that a firm will go into bankruptcy within two years. View the company’s Altman Z score here.

Efficiency Metrics: how much free cash flow does CROX generate as a percentage of total sales? Has it been increasing or decreasing over time? Review the firm’s free cash flow margin here.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Expertise: financial modeling, mergers & acquisitions. Andy is also a founder at finbox.io, where he’s focused on building tools that make it faster and easier for investors to do investment research. Andy’s background is in investment banking where he led the analysis on over 50 board advisory engagements involving mergers and acquisitions, fairness opinions and solvency opinions. Some of his board advisory highlights: - Sears Holdings Corp.’s $620 mm spin-off via rights offering of Sears Outlet, Hometown Stores and Sears Hardware Stores. - Cerberus Capital Management’s $3.3 bn acquisition of SUPERVALU Inc.’s New Albertsons, Inc. assets. Andy can be reached at andy@finbox.io or at +1 (516) 778-6257.

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