Yahoo Finance Why We Like Ruth’s Hospitality Group, Inc.’s (NASDAQ:RUTH) 32% Return On Capital Employed
Today we’ll evaluate Ruth’s Hospitality Group, Inc. (NASDAQ:RUTH) 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. Then we’ll determine how its current liabilities are affecting 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. Overall, it is a valuable metric that has its flaws. 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?
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 Ruth’s Hospitality Group:
0.32 = US$51m ÷ (US$240m – US$69m) (Based on the trailing twelve months to September 2018.)
So, Ruth’s Hospitality Group has an ROCE of 32%.
See our latest analysis for Ruth’s Hospitality Group
Does Ruth’s Hospitality Group Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Ruth’s Hospitality Group’s ROCE appears to be substantially greater than the 10% average in the Hospitality industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, Ruth’s Hospitality Group’s ROCE is currently very good.
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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Ruth’s Hospitality Group.
What Are Current Liabilities, And How Do They Affect Ruth’s Hospitality Group’s ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Ruth’s Hospitality Group has total assets of US$240m and current liabilities of US$69m. Therefore its current liabilities are equivalent to approximately 29% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.
Our Take On Ruth’s Hospitality Group’s ROCE
This is good to see, and with such a high ROCE, Ruth’s Hospitality Group may be worth a closer look. Of course you might be able to find a better stock than Ruth’s Hospitality Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
