Why We Like Restaurant Brands New Zealand Limited’s (NZSE:RBD) 17% Return On Capital Employed

Today we’ll evaluate Restaurant Brands New Zealand Limited (NZSE:RBD) 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 of all, we’ll work out how to calculate ROCE. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its 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.’

How Do You Calculate Return On Capital Employed?

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 Restaurant Brands New Zealand:

0.17 = NZ$63m ÷ (NZ$474m – NZ$88m) (Based on the trailing twelve months to September 2018.)

Therefore, Restaurant Brands New Zealand has an ROCE of 17%.

See our latest analysis for Restaurant Brands New Zealand

Does Restaurant Brands New Zealand Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Restaurant Brands New Zealand’s ROCE appears to be substantially greater than the 10% average in the Hospitality industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of where Restaurant Brands New Zealand sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

Restaurant Brands New Zealand’s current ROCE of 17% is lower than 3 years ago, when the company reported a 39% ROCE. This makes us wonder if the business is facing new challenges.

NZSE:RBD Last Perf December 22nd 18
NZSE:RBD Last Perf December 22nd 18

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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Restaurant Brands New Zealand.

Restaurant Brands New Zealand’s Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) unfairly boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.

Restaurant Brands New Zealand has total liabilities of NZ$88m and total assets of NZ$474m. As a result, its current liabilities are equal to approximately 19% of its total assets. Low current liabilities are not boosting the ROCE too much.

What We Can Learn From Restaurant Brands New Zealand’s ROCE

Overall, Restaurant Brands New Zealand has a decent ROCE and could be worthy of further research. But note: Restaurant Brands New Zealand may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.