Today we'll evaluate Chuy's Holdings, Inc. (NASDAQ:CHUY) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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.
So, How Do We Calculate ROCE?
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 Chuy's Holdings:
0.038 = US$16m ÷ (US$455m - US$39m) (Based on the trailing twelve months to June 2019.)
Therefore, Chuy's Holdings has an ROCE of 3.8%.
Does Chuy's Holdings Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Chuy's Holdings's ROCE appears meaningfully below the 8.9% average reported by the Hospitality industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Chuy's Holdings compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.7% available in government bonds. Readers may wish to look for more rewarding investments.
We can see that, Chuy's Holdings currently has an ROCE of 3.8%, less than the 13% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Chuy's Holdings's ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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, 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.
What Are Current Liabilities, And How Do They Affect Chuy's Holdings's 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Chuy's Holdings has total assets of US$455m and current liabilities of US$39m. Therefore its current liabilities are equivalent to approximately 8.7% of its total assets. Chuy's Holdings has very few current liabilities, which have a minimal effect on its already low ROCE.
The Bottom Line On Chuy's Holdings's ROCE
Nevertheless, there are potentially more attractive companies to invest in. You might be able to find a better investment than Chuy's Holdings. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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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 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.