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Why The Chefs' Warehouse, Inc.’s (NASDAQ:CHEF) Return On Capital Employed Might Be A Concern

Simply Wall St

Today we are going to look at The Chefs' Warehouse, Inc. (NASDAQ:CHEF) 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.

First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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. 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?

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:

0.073 = US$54m ÷ (US$878m - US$139m) (Based on the trailing twelve months to June 2019.)

So, Chefs' Warehouse has an ROCE of 7.3%.

See our latest analysis for Chefs' Warehouse

Is Chefs' Warehouse's ROCE Good?

One way to assess ROCE is to compare similar companies. In this analysis, Chefs' Warehouse's ROCE appears meaningfully below the 9.7% average reported by the Consumer Retailing industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Aside from the industry comparison, Chefs' Warehouse's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

You can click on the image below to see (in greater detail) how Chefs' Warehouse's past growth compares to other companies.

NasdaqGS:CHEF Past Revenue and Net Income, September 14th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. 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 Chefs' Warehouse.

How Chefs' Warehouse's Current Liabilities Impact Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Chefs' Warehouse has total assets of US$878m and current liabilities of US$139m. As a result, its current liabilities are equal to approximately 16% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

The Bottom Line On Chefs' Warehouse's ROCE

If Chefs' Warehouse 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 Chefs' Warehouse. So you may wish to see this free collection of other companies that have grown earnings strongly.

I will like Chefs' Warehouse better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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 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. Thank you for reading.