Are Bloomin' Brands, Inc.’s Returns On Capital Worth Investigating?
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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. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared 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. 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.'
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Bloomin' Brands:
0.11 = US$184m ÷ (US$2.5b - US$791m) (Based on the trailing twelve months to December 2018.)
Therefore, Bloomin' Brands has an ROCE of 11%.
Check out our latest analysis for Bloomin' Brands
Is Bloomin' Brands's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. It appears that Bloomin' Brands's ROCE is fairly close to the Hospitality industry average of 10%. Independently of how Bloomin' Brands compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Bloomin' Brands's Current Liabilities Skew 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Bloomin' Brands has total assets of US$2.5b and current liabilities of US$791m. Therefore its current liabilities are equivalent to approximately 32% of its total assets. Bloomin' Brands has a medium level of current liabilities, which would boost the ROCE.
The Bottom Line On Bloomin' Brands's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. You might be able to find a better buy than Bloomin' Brands. 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 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.
