Today we’ll evaluate Starbucks Corporation (NASDAQ:SBUX) to determine whether it could have potential as an investment idea. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its 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.
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Starbucks:
0.21 = US$4.1b ÷ (US$28b – US$8.7b) (Based on the trailing twelve months to December 2019.)
Therefore, Starbucks has an ROCE of 21%.
Does Starbucks Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Starbucks’s ROCE appears to be substantially greater than the 8.5% 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 the industry comparison, in absolute terms, Starbucks’s ROCE currently appears to be excellent.
Starbucks’s current ROCE of 21% is lower than its ROCE in the past, which was 41%, 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Starbucks’s ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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 Starbucks.
Do Starbucks’s Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
Starbucks has current liabilities of US$8.7b and total assets of US$28b. As a result, its current liabilities are equal to approximately 31% of its total assets. Starbucks’s ROCE is boosted somewhat by its middling amount of current liabilities.
Our Take On Starbucks’s ROCE
Despite this, it reports a high ROCE, and may be worth investigating further. Starbucks shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
I will like Starbucks better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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