Are Dunkin’ Brands Group, Inc.’s (NASDAQ:DNKN) High Returns Really That Great?

Today we are going to look at Dunkin’ Brands Group, Inc. (NASDAQ:DNKN) to see whether it might be an attractive investment prospect. 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. 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 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.’

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 Dunkin’ Brands Group:

0.14 = US$399m ÷ (US$3.5b – US$540m) (Based on the trailing twelve months to December 2018.)

So, Dunkin’ Brands Group has an ROCE of 14%.

Check out our latest analysis for Dunkin’ Brands Group

Is Dunkin’ Brands Group’s ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, we find that Dunkin’ Brands Group’s ROCE is meaningfully better than the 10% average in the Hospitality industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Dunkin’ Brands Group compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

NasdaqGS:DNKN Past Revenue and Net Income, March 1st 2019
NasdaqGS:DNKN Past Revenue and Net Income, March 1st 2019

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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Dunkin’ Brands Group.

Dunkin’ Brands Group’s Current Liabilities And Their Impact On 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Dunkin’ Brands Group has total liabilities of US$540m and total assets of US$3.5b. As a result, its current liabilities are equal to approximately 16% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

Our Take On Dunkin’ Brands Group’s ROCE

This is good to see, and with a sound ROCE, Dunkin’ Brands Group could be worth a closer look. Of course you might be able to find a better stock than Dunkin’ Brands Group. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.