Yahoo Finance Is Pizza Pizza Royalty Corp.’s (TSE:PZA) Return On Capital Employed Any Good?
Today we’ll evaluate Pizza Pizza Royalty Corp. (TSE:PZA) to determine whether it could have potential as an investment idea. 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.
Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared 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 ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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 Pizza Pizza Royalty:
0.099 = CA$35m ÷ (CA$356m – CA$3.1m) (Based on the trailing twelve months to September 2018.)
So, Pizza Pizza Royalty has an ROCE of 9.9%.
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Does Pizza Pizza Royalty Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. It appears that Pizza Pizza Royalty’s ROCE is fairly close to the Hospitality industry average of 9.3%. Setting aside the industry comparison for now, Pizza Pizza Royalty’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.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Pizza Pizza Royalty.
How Pizza Pizza Royalty’s Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
Pizza Pizza Royalty has total liabilities of CA$3.1m and total assets of CA$356m. As a result, its current liabilities are equal to approximately 0.9% of its total assets. Pizza Pizza Royalty reports few current liabilities, which have a negligible impact on its unremarkable ROCE.
What We Can Learn From Pizza Pizza Royalty’s ROCE
If performance improves, then Pizza Pizza Royalty may be an OK investment, especially at the right valuation. Of course you might be able to find a better stock than Pizza Pizza Royalty. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Pizza Pizza Royalty better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
