Yahoo Finance Here’s why The City Pub Group plc’s (LON:CPC) Returns On Capital Matters So Much
Today we'll evaluate The City Pub Group plc (LON:CPC) 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.
First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. 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'.
So, How Do We Calculate ROCE?
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 City Pub Group:
0.044 = UK£4.9m ÷ (UK£119m - UK£9.2m) (Based on the trailing twelve months to June 2019.)
Therefore, City Pub Group has an ROCE of 4.4%.
Check out our latest analysis for City Pub Group
Is City Pub Group's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see City Pub Group's ROCE is meaningfully below the Hospitality industry average of 7.5%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how City Pub Group stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
You can click on the image below to see (in greater detail) how City Pub Group's past growth compares to other companies.
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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for City Pub Group.
What Are Current Liabilities, And How Do They Affect City Pub Group'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 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.
City Pub Group has total assets of UK£119m and current liabilities of UK£9.2m. As a result, its current liabilities are equal to approximately 7.7% of its total assets. City Pub Group reports few current liabilities, which have a negligible impact on its unremarkable ROCE.
Our Take On City Pub Group's ROCE
City Pub Group looks like an ok business, but on this analysis it is not at the top of our buy list. Of course, you might also be able to find a better stock than City Pub 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.
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 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.
