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Today we are going to look at Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) 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.
First up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Understanding 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. 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 Cracker Barrel Old Country Store:
0.24 = US$294m ÷ (US$1.6b – US$376m) (Based on the trailing twelve months to November 2018.)
So, Cracker Barrel Old Country Store has an ROCE of 24%.
Does Cracker Barrel Old Country Store Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Cracker Barrel Old Country Store’s ROCE is meaningfully higher 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. Regardless of the industry comparison, in absolute terms, Cracker Barrel Old Country Store’s ROCE currently appears to be excellent.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. 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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Cracker Barrel Old Country Store.
What Are Current Liabilities, And How Do They Affect Cracker Barrel Old Country Store’s ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Cracker Barrel Old Country Store has total liabilities of US$376m and total assets of US$1.6b. Therefore its current liabilities are equivalent to approximately 24% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.
The Bottom Line On Cracker Barrel Old Country Store’s ROCE
This is good to see, and with such a high ROCE, Cracker Barrel Old Country Store may be worth a closer look. Of course you might be able to find a better stock than Cracker Barrel Old Country Store. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Cracker Barrel Old Country Store better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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 email@example.com.