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Are National Beverage Corp.’s (NASDAQ:FIZZ) High Returns Really That Great?

Today we'll look at National Beverage Corp. (NASDAQ:FIZZ) and reflect on its potential as an investment. 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. 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. In general, businesses with a higher ROCE are usually better quality. 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?

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 National Beverage:

0.32 = US$153m ÷ (US$589m - US$109m) (Based on the trailing twelve months to January 2020.)

So, National Beverage has an ROCE of 32%.

View our latest analysis for National Beverage

Is National Beverage's ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, we find that National Beverage's ROCE is meaningfully better than the 11% average in the Beverage 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. Setting aside the comparison to its industry for a moment, National Beverage's ROCE in absolute terms currently looks quite high.

We can see that, National Beverage currently has an ROCE of 32%, less than the 60% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how National Beverage's past growth compares to other companies.

NasdaqGS:FIZZ Past Revenue and Net Income March 30th 2020
NasdaqGS:FIZZ Past Revenue and Net Income March 30th 2020

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 National Beverage.

What Are Current Liabilities, And How Do They Affect National Beverage's ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

National Beverage has current liabilities of US$109m and total assets of US$589m. Therefore its current liabilities are equivalent to approximately 19% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.

The Bottom Line On National Beverage's ROCE

With low current liabilities and a high ROCE, National Beverage could be worthy of further investigation. National Beverage looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

If you are like me, then you will 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.