Investors Met With Slowing Returns on Capital At Domino's Pizza Enterprises (ASX:DMP)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Domino's Pizza Enterprises' (ASX:DMP) trend of ROCE, we liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Domino's Pizza Enterprises is:

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

0.15 = AU$260m ÷ (AU$2.5b - AU$703m) (Based on the trailing twelve months to January 2022).

Therefore, Domino's Pizza Enterprises has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Hospitality industry.

See our latest analysis for Domino's Pizza Enterprises

In the above chart we have measured Domino's Pizza Enterprises' prior ROCE against its prior performance, but the future is arguably more important. 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?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 15% and the business has deployed 102% more capital into its operations. 15% is a pretty standard return, and it provides some comfort knowing that Domino's Pizza Enterprises has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Our Take On Domino's Pizza Enterprises' ROCE

To sum it up, Domino's Pizza Enterprises has simply been reinvesting capital steadily, at those decent rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you want to continue researching Domino's Pizza Enterprises, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.