Today we are going to look at Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY) 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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 Dave & Buster's Entertainment:
0.082 = US$157m ÷ (US$2.2b - US$259m) (Based on the trailing twelve months to May 2019.)
So, Dave & Buster's Entertainment has an ROCE of 8.2%.
Does Dave & Buster's Entertainment Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. It appears that Dave & Buster's Entertainment's ROCE is fairly close to the Hospitality industry average of 8.8%. Separate from how Dave & Buster's Entertainment stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
Dave & Buster's Entertainment's current ROCE of 8.2% is lower than 3 years ago, when the company reported a 15% ROCE. This makes us wonder if the business is facing new challenges. You can see in the image below how Dave & Buster's Entertainment'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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Dave & Buster's Entertainment.
How Dave & Buster's Entertainment's Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Dave & Buster's Entertainment has total assets of US$2.2b and current liabilities of US$259m. As a result, its current liabilities are equal to approximately 12% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
What We Can Learn From Dave & Buster's Entertainment's ROCE
If Dave & Buster's Entertainment continues to earn an uninspiring ROCE, there may be better places to invest. Of course, you might also be able to find a better stock than Dave & Buster's Entertainment. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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 firstname.lastname@example.org. 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.