What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Texas Roadhouse (NASDAQ:TXRH) we aren’t jumping out of our chairs at how returns are trending, but let’s have a deeper look.
Understanding Return On Capital Employed (ROCE)
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Texas Roadhouse:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.096 = US$167m ÷ (US$2.1b – US$311m) (Based on the trailing twelve months to March 2020).
Thus, Texas Roadhouse has an ROCE of 9.6%. On its own that’s a low return, but compared to the average of 6.9% generated by the Hospitality industry, it’s much better.
Above you can see how the current ROCE for Texas Roadhouse compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Texas Roadhouse Tell Us?
When we looked at the ROCE trend at Texas Roadhouse, we didn’t gain much confidence. Around five years ago the returns on capital were 19%, but since then they’ve fallen to 9.6%. Meanwhile, the business is utilizing more capital but this hasn’t moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It’s worth keeping an eye on the company’s earnings from here on to see if these investments do end up contributing to the bottom line.
What We Can Learn From Texas Roadhouse’s ROCE
To conclude, we’ve found that Texas Roadhouse is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 60% over the last five years. Ultimately, if the underlying trends persist, we wouldn’t hold our breath on it being a multi-bagger going forward.
While Texas Roadhouse doesn’t shine too bright in this respect, it’s still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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