Why You Should Care About Bloomin’ Brands, Inc.’s (NASDAQ:BLMN) Low Return On Capital

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Today we are going to look at Bloomin’ Brands, Inc. (NASDAQ:BLMN) 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, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

What is 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. 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.’

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 Bloomin’ Brands:

0.069 = US$190m ÷ (US$3.6b – US$822m) (Based on the trailing twelve months to March 2019.)

Therefore, Bloomin’ Brands has an ROCE of 6.9%.

Check out our latest analysis for Bloomin’ Brands

Is Bloomin’ Brands’s ROCE Good?

One way to assess ROCE is to compare similar companies. We can see Bloomin’ Brands’s ROCE is meaningfully below the Hospitality industry average of 9.4%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how Bloomin’ Brands stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.

Bloomin’ Brands’s current ROCE of 6.9% is lower than its ROCE in the past, which was 12%, 3 years ago. So investors might consider if it has had issues recently.

NasdaqGS:BLMN Past Revenue and Net Income, June 18th 2019
NasdaqGS:BLMN Past Revenue and Net Income, June 18th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. 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 Bloomin’ Brands.

What Are Current Liabilities, And How Do They Affect Bloomin’ Brands’s ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Bloomin’ Brands has total liabilities of US$822m and total assets of US$3.6b. Therefore its current liabilities are equivalent to approximately 23% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

What We Can Learn From Bloomin’ Brands’s ROCE

With that in mind, we’re not overly impressed with Bloomin’ Brands’s ROCE, so it may not be the most appealing prospect. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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 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. Thank you for reading.