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Today we'll evaluate Flanigan's Enterprises, Inc. (NYSEMKT:BDL) 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, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding 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. 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 Flanigan's Enterprises:
0.11 = US$5.9m ÷ (US$69m - US$17m) (Based on the trailing twelve months to March 2019.)
So, Flanigan's Enterprises has an ROCE of 11%.
Does Flanigan's Enterprises Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Flanigan's Enterprises's ROCE appears to be substantially greater than the 9.4% 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. Independently of how Flanigan's Enterprises compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Flanigan's Enterprises's current ROCE of 11% is lower than its ROCE in the past, which was 16%, 3 years ago. So investors might consider if it has had issues recently.
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 only a point-in-time measure. If Flanigan's Enterprises is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Flanigan's Enterprises's Current Liabilities And Their Impact On 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Flanigan's Enterprises has total liabilities of US$17m and total assets of US$69m. As a result, its current liabilities are equal to approximately 24% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
Our Take On Flanigan's Enterprises's ROCE
With that in mind, Flanigan's Enterprises's ROCE appears pretty good. There might be better investments than Flanigan's Enterprises out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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 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.