What Does The Chefs' Warehouse, Inc.’s (NASDAQ:CHEF) 6.6% ROCE Say About The Business?
Today we'll evaluate The Chefs' Warehouse, Inc. (NASDAQ:CHEF) to determine whether it could have potential as an investment idea. 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. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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?
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 Chefs' Warehouse:
0.066 = US$57m ÷ (US$1.0b - US$150m) (Based on the trailing twelve months to December 2019.)
Therefore, Chefs' Warehouse has an ROCE of 6.6%.
View our latest analysis for Chefs' Warehouse
Is Chefs' Warehouse's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Chefs' Warehouse's ROCE is around the 8.2% average reported by the Consumer Retailing industry. Separate from how Chefs' Warehouse 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.
Chefs' Warehouse's current ROCE of 6.6% is lower than 3 years ago, when the company reported a 9.0% ROCE. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how Chefs' Warehouse's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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 Chefs' Warehouse's Current Liabilities Skew Its 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 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.
Chefs' Warehouse has current liabilities of US$150m and total assets of US$1.0b. As a result, its current liabilities are equal to approximately 15% 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 Chefs' Warehouse's ROCE
That said, Chefs' Warehouse's ROCE is mediocre, there may be more attractive investments around. Of course, you might also be able to find a better stock than Chefs' Warehouse. 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.
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.
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. Thank you for reading.
