Today we are going to look at Hollywood Bowl Group plc (LON:BOWL) to see whether it might be an attractive investment prospect. 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. Then we’ll compare its ROCE to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.
So, How Do We Calculate ROCE?
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 Hollywood Bowl Group:
0.20 = UK£27m ÷ (UK£155m – UK£22m) (Based on the trailing twelve months to March 2019.)
So, Hollywood Bowl Group has an ROCE of 20%.
Does Hollywood Bowl Group Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In our analysis, Hollywood Bowl Group’s ROCE is meaningfully higher than the 7.9% average in the Hospitality industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Hollywood Bowl Group’s ROCE in absolute terms currently looks quite high.
Our data shows that Hollywood Bowl Group currently has an ROCE of 20%, compared to its ROCE of 14% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly.
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. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Hollywood Bowl Group.
How Hollywood Bowl Group’s Current Liabilities Impact 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. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Hollywood Bowl Group has total assets of UK£155m and current liabilities of UK£22m. As a result, its current liabilities are equal to approximately 14% of its total assets. The fairly low level of current liabilities won’t have much impact on the already great ROCE.
Our Take On Hollywood Bowl Group’s ROCE
This is good to see, and with such a high ROCE, Hollywood Bowl Group may be worth a closer look. Hollywood Bowl Group 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.