The Returns On Capital At Domino's Pizza Enterprises (ASX:DMP) Don't Inspire Confidence

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Domino's Pizza Enterprises (ASX:DMP) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.13 = AU$245m ÷ (AU$2.4b - AU$544m) (Based on the trailing twelve months to December 2020).

So, Domino's Pizza Enterprises has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 7.7% it's much better.

View 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.

How Are Returns Trending?

When we looked at the ROCE trend at Domino's Pizza Enterprises, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 13% from 20% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Domino's Pizza Enterprises' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Domino's Pizza Enterprises. Furthermore the stock has climbed 74% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we've found 1 warning sign for Domino's Pizza Enterprises that we think 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. 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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