Today we are going to look at Speed Rabbit Pizza SA (EPA:MLSRP) to see whether it might be an attractive investment prospect. 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, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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'.
So, How Do We Calculate ROCE?
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 Speed Rabbit Pizza:
0.074 = €841k ÷ (€12m - €736k) (Based on the trailing twelve months to December 2018.)
Therefore, Speed Rabbit Pizza has an ROCE of 7.4%.
Is Speed Rabbit Pizza's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Speed Rabbit Pizza's ROCE is meaningfully higher than the 5.8% average in the Hospitality industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the industry comparison for now, Speed Rabbit Pizza's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
You can see in the image below how Speed Rabbit Pizza's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. How cyclical is Speed Rabbit Pizza? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Speed Rabbit Pizza's Current Liabilities And Their Impact On 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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Speed Rabbit Pizza has total liabilities of €736k and total assets of €12m. As a result, its current liabilities are equal to approximately 6.1% of its total assets. Speed Rabbit Pizza reports few current liabilities, which have a negligible impact on its unremarkable ROCE.
What We Can Learn From Speed Rabbit Pizza's ROCE
Speed Rabbit Pizza looks like an ok business, but on this analysis it is not at the top of our buy list. You might be able to find a better investment than Speed Rabbit Pizza. 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).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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 email@example.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.