Today we are going to look at Chuy’s Holdings, Inc. (NASDAQ:CHUY) 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 of all, we’ll work out how to 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.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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 Chuy’s Holdings:
0.038 = US$16m ÷ (US$443m – US$32m) (Based on the trailing twelve months to March 2019.)
Therefore, Chuy’s Holdings has an ROCE of 3.8%.
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Does Chuy’s Holdings Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. We can see Chuy’s Holdings’s ROCE is meaningfully below the Hospitality industry average of 9.5%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Chuy’s Holdings’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.
Chuy’s Holdings’s current ROCE of 3.8% is lower than its ROCE in the past, which was 13%, 3 years ago. This makes us wonder if the business is facing new challenges.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Chuy’s Holdings.
What Are Current Liabilities, And How Do They Affect Chuy’s Holdings’s 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 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) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Chuy’s Holdings has total liabilities of US$32m and total assets of US$443m. Therefore its current liabilities are equivalent to approximately 7.3% of its total assets. Chuy’s Holdings has very few current liabilities, which have a minimal effect on its already low ROCE.
The Bottom Line On Chuy’s Holdings’s ROCE
Still, investors could probably find more attractive prospects with better performance out there. You might be able to find a better investment than Chuy’s Holdings. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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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.