Today we'll evaluate Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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?
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 Cracker Barrel Old Country Store:
0.24 = US$283m ÷ (US$1.6b - US$392m) (Based on the trailing twelve months to August 2019.)
So, Cracker Barrel Old Country Store has an ROCE of 24%.
Does Cracker Barrel Old Country Store Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Cracker Barrel Old Country Store's ROCE is meaningfully higher than the 8.6% average in the Hospitality industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, Cracker Barrel Old Country Store's ROCE is currently very good.
You can see in the image below how Cracker Barrel Old Country Store's ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Cracker Barrel Old Country Store.
How Cracker Barrel Old Country Store'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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Cracker Barrel Old Country Store has total liabilities of US$392m and total assets of US$1.6b. As a result, its current liabilities are equal to approximately 25% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.
What We Can Learn From Cracker Barrel Old Country Store's ROCE
Low current liabilities and high ROCE is a good combination, making Cracker Barrel Old Country Store look quite interesting. Cracker Barrel Old Country Store looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.