Today we are going to look at Jack in the Box Inc. (NASDAQ:JACK) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
Firstly, we'll go over how we calculate ROCE. 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 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. Overall, it is a valuable metric that has its flaws. 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?
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 Jack in the Box:
0.33 = US$202m ÷ (US$831m - US$219m) (Based on the trailing twelve months to July 2019.)
So, Jack in the Box has an ROCE of 33%.
Does Jack in the Box Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Jack in the Box's ROCE appears to be substantially greater than the 8.9% 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. Setting aside the comparison to its industry for a moment, Jack in the Box's ROCE in absolute terms currently looks quite high.
Our data shows that Jack in the Box currently has an ROCE of 33%, compared to its ROCE of 21% 3 years ago. This makes us think the business might be improving. You can see in the image below how Jack in the Box'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. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Jack in the Box.
How Jack in the Box's Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
Jack in the Box has total liabilities of US$219m and total assets of US$831m. Therefore its current liabilities are equivalent to approximately 26% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.
The Bottom Line On Jack in the Box's ROCE
This is good to see, and with such a high ROCE, Jack in the Box may be worth a closer look. Jack in the Box shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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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.