Domino's Pizza Enterprises (ASX:DMP) Will Want To Turn Around Its Return Trends

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. In light of that, when we looked at Domino's Pizza Enterprises (ASX:DMP) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Domino's Pizza Enterprises, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.094 = AU$203m ÷ (AU$3.0b - AU$779m) (Based on the trailing twelve months to January 2023).

So, Domino's Pizza Enterprises has an ROCE of 9.4%. Even though it's in line with the industry average of 8.7%, it's still a low return by itself.

See our latest analysis for Domino's Pizza Enterprises

Above you can see how the current ROCE for Domino's Pizza Enterprises compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Domino's Pizza Enterprises here for free.

What Can We Tell From Domino's Pizza Enterprises' ROCE Trend?

In terms of Domino's Pizza Enterprises' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 17% over the last five years. 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.

On a side note, Domino's Pizza Enterprises' current liabilities have increased over the last five years to 26% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 9.4%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On Domino's Pizza Enterprises' ROCE

In summary, Domino's Pizza Enterprises is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 21% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Like most companies, Domino's Pizza Enterprises does come with some risks, and we've found 3 warning signs that you should be aware of.

While Domino's Pizza Enterprises isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.