Yahoo Finance What Can We Make Of Ruth's Hospitality Group, Inc.’s (NASDAQ:RUTH) High Return On Capital?
Today we'll evaluate Ruth's Hospitality Group, Inc. (NASDAQ:RUTH) to determine whether it could have potential as an investment idea. 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.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. 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.'
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 Ruth's Hospitality Group:
0.17 = US$53m ÷ (US$410m - US$91m) (Based on the trailing twelve months to March 2019.)
Therefore, Ruth's Hospitality Group has an ROCE of 17%.
View our latest analysis for Ruth's Hospitality Group
Is Ruth's Hospitality Group's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Ruth's Hospitality Group's ROCE appears to be substantially greater than the 9.3% 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. Regardless of where Ruth's Hospitality Group sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Ruth's Hospitality Group's current ROCE of 17% is lower than 3 years ago, when the company reported a 38% ROCE. So investors might consider if it has had issues recently. The image below shows how Ruth's Hospitality Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Ruth's Hospitality Group's Current Liabilities And Their Impact On 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 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Ruth's Hospitality Group has total assets of US$410m and current liabilities of US$91m. Therefore its current liabilities are equivalent to approximately 22% of its total assets. Low current liabilities are not boosting the ROCE too much.
What We Can Learn From Ruth's Hospitality Group's ROCE
Overall, Ruth's Hospitality Group has a decent ROCE and could be worthy of further research. There might be better investments than Ruth's Hospitality Group 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.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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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.
