Today we are going to look at Restaurant Brands International Inc. (NYSE:QSR) 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting 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. 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?
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 Restaurant Brands International:
0.098 = US$1.9b ÷ (US$21b - US$1.3b) (Based on the trailing twelve months to March 2019.)
So, Restaurant Brands International has an ROCE of 9.8%.
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Does Restaurant Brands International Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Restaurant Brands International's ROCE appears to be around the 9.5% average of the Hospitality industry. Setting aside the industry comparison for now, Restaurant Brands International's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Restaurant Brands International's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Restaurant Brands International has total liabilities of US$1.3b and total assets of US$21b. Therefore its current liabilities are equivalent to approximately 6.3% of its total assets. With low levels of current liabilities, at least Restaurant Brands International's mediocre ROCE is not unduly boosted.
The Bottom Line On Restaurant Brands International's ROCE
Restaurant Brands International looks like an ok business, but on this analysis it is not at the top of our buy list. Of course, you might also be able to find a better stock than Restaurant Brands International. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Restaurant Brands International better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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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.