The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning the link between Whitbread PLC (LON:WTB)’s return fundamentals and stock market performance.
Buying Whitbread makes you a partial owner of the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. To understand Whitbread’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.
What is Return on Capital Employed (ROCE)?
When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. We’ll look at Whitbread’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. Take a look at the formula box beneath:
ROCE Calculation for WTB
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = UK£578.40m ÷ (UK£4.89b – UK£851.20m) = 14.31%
WTB’s 14.31% ROCE means that for every £100 you invest, the company creates £14.3. Comparing this to a healthy 15% benchmark shows Whitbread is currently unable to return a desired amount to owners for the use of their capital, which isn’t favourable for investors who have forgone other potentially solid companies.
A deeper look
Although Whitbread is in an unfavourable position, you should know that this could change if the company is able to increase earnings on the same capital base or find new efficiencies that require less capital to produce earnings. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. Three years ago, WTB’s ROCE was 14.69%, which means the company’s capital returns have worsened. Conversely, the movement in the earnings variable shows a jump from UK£464.50m to UK£578.40m albeit capital employed has improved by a proportionally greater amount in response to a rise in total assets , which suggests investor’s ROCE has fallen because the company requires more capital to create earnings despite the previous growth in EBT.
ROCE for WTB investors has fallen in the last few years and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for WTB’s future growth? Take a look at our free research report of analyst consensus for WTB’s outlook.
- Valuation: What is WTB worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether WTB is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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 firstname.lastname@example.org.