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What Can We Make Of Bowl America Incorporated’s (NYSEMKT:BWL.A) High Return On Capital?

Miguel Kauffman

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Today we’ll evaluate Bowl America Incorporated (NYSEMKT:BWL.A) to determine whether it could have potential as an investment idea. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.

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 Bowl America:

0.16 = US$4.0m ÷ (US$28m – US$3.0m) (Based on the trailing twelve months to September 2018.)

So, Bowl America has an ROCE of 16%.

See our latest analysis for Bowl America

Is Bowl America’s ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Bowl America’s ROCE is meaningfully better than the 9.7% average in the Hospitality industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Separate from Bowl America’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

As we can see, Bowl America currently has an ROCE of 16% compared to its ROCE 3 years ago, which was 7.8%. This makes us think about whether the company has been reinvesting shrewdly.

AMEX:BWL.A Last Perf February 5th 19
AMEX:BWL.A Last Perf February 5th 19

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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Bowl America has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Do Bowl America’s Current Liabilities Skew Its ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Bowl America has total assets of US$28m and current liabilities of US$3.0m. Therefore its current liabilities are equivalent to approximately 11% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

Our Take On Bowl America’s ROCE

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

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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 editorial-team@simplywallst.com.