Is The Chefs’ Warehouse, Inc.’s (NASDAQ:CHEF) 7.3% Return On Capital Employed Good News?

Today we’ll look at The Chefs’ Warehouse, Inc. (NASDAQ:CHEF) and reflect on its potential as an investment. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First up, we’ll look at what ROCE is and how we calculate it. 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 is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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 Chefs’ Warehouse:

0.073 = US$55m ÷ (US$891m – US$138m) (Based on the trailing twelve months to September 2019.)

So, Chefs’ Warehouse has an ROCE of 7.3%.

Check out our latest analysis for Chefs’ Warehouse

Does Chefs’ Warehouse Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Chefs’ Warehouse’s ROCE appears to be around the 8.6% average of the Consumer Retailing industry. Aside from the industry comparison, Chefs’ Warehouse’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

The image below shows how Chefs’ Warehouse’s ROCE compares to its industry, and you can click it to see more detail on its past growth.

NasdaqGS:CHEF Past Revenue and Net Income, December 30th 2019
NasdaqGS:CHEF Past Revenue and Net Income, December 30th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Chefs’ Warehouse.

Chefs’ Warehouse’s Current Liabilities And Their Impact On Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Chefs’ Warehouse has total assets of US$891m and current liabilities of US$138m. Therefore its current liabilities are equivalent to approximately 16% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

The Bottom Line On Chefs’ Warehouse’s ROCE

That said, Chefs’ Warehouse’s ROCE is mediocre, there may be more attractive investments around. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

I will like Chefs’ Warehouse better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.

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