Yahoo Finance Why Domino's Pizza Group plc’s (LON:DOM) Return On Capital Employed Is Impressive
Today we'll evaluate Domino's Pizza Group plc (LON:DOM) 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.
First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. 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.
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 Domino's Pizza Group:
0.31 = UK£86m ÷ (UK£387m - UK£105m) (Based on the trailing twelve months to June 2019.)
So, Domino's Pizza Group has an ROCE of 31%.
See our latest analysis for Domino's Pizza Group
Does Domino's Pizza Group Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Domino's Pizza Group's ROCE is meaningfully higher than the 7.8% average in the Hospitality industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Domino's Pizza Group's ROCE in absolute terms currently looks quite high.
We can see that, Domino's Pizza Group currently has an ROCE of 31%, less than the 55% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Domino's Pizza Group's ROCE compares to its industry. Click to see more on 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. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Domino's Pizza Group's Current Liabilities Impact 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. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Domino's Pizza Group has total assets of UK£387m and current liabilities of UK£105m. Therefore its current liabilities are equivalent to approximately 27% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.
Our Take On Domino's Pizza Group's ROCE
Low current liabilities and high ROCE is a good combination, making Domino's Pizza Group look quite interesting. There might be better investments than Domino's Pizza 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.
There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of growing companies that insiders are buying.
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.
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. Thank you for reading.
