Investors Could Be Concerned With Papa John's International's (NASDAQ:PZZA) Returns On Capital

By
Simply Wall St
Published
January 05, 2022
NasdaqGS:PZZA
Source: Shutterstock

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Papa John's International (NASDAQ:PZZA), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Papa John's International:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.29 = US$165m ÷ (US$890m - US$318m) (Based on the trailing twelve months to September 2021).

Therefore, Papa John's International has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 9.0%.

View our latest analysis for Papa John's International

roce
NasdaqGS:PZZA Return on Capital Employed January 5th 2022

In the above chart we have measured Papa John's International's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Papa John's International.

The Trend Of ROCE

On the surface, the trend of ROCE at Papa John's International doesn't inspire confidence. To be more specific, while the ROCE is still high, it's fallen from 41% where it was five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 36%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Papa John's International is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 54% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

Papa John's International does have some risks though, and we've spotted 3 warning signs for Papa John's International that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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