This analysis is intended to introduce important early concepts to people who are starting to invest and want a simplistic look at the return on Dunkin’ Brands Group Inc (NASDAQ:DNKN) stock.
Dunkin’ Brands Group stock represents an ownership share in the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. Your return is tied to DNKN’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Therefore, looking at how efficiently Dunkin’ Brands Group is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
What is Return on Capital Employed (ROCE)?
Choosing to invest in Dunkin’ Brands Group comes at the cost of investing in another potentially favourable company. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. We’ll look at Dunkin’ Brands Group’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 DNKN
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$345m ÷ (US$3.4b – US$428m) = 12%
DNKN’s 12% ROCE means that for every $100 you invest, the company creates $11.8. This makes Dunkin’ Brands Group slightly mediocre when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future, investor capital will be able to compound over time, but still may be missing out on some potential growth elsewhere.
Then why have investors invested?
The underperforming ROCE is not ideal for Dunkin’ Brands Group investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, DNKN’s ROCE may increase, in which case your portfolio could benefit from holding the company. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Looking three years in the past, it is evident that DNKN’s ROCE has risen from 9.2%, indicating the company’s capital returns have stengthened. Over the same period, EBT went from US$276m to US$345m and the amount of capital employed has decreased due to an increase in the use of current liabilities (use of borrowed money to create earnings) , which means that ROCE has increased as a result of Dunkin’ Brands Group’s ability to grow earnings in conjunction with increased capital efficiency.
Despite DNKN’s current ROCE remains at an unattractive level, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. It is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and valuation to determine whether there is potential for return by focusing our attention elsewhere. 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 DNKN’s future growth? Take a look at our free research report of analyst consensus for DNKN’s outlook.
- Valuation: What is DNKN 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 DNKN 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.