Returns On Capital At Pizza Pizza Royalty (TSE:PZA) Have Hit The Brakes

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Pizza Pizza Royalty (TSE:PZA) 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. The formula for this calculation on Pizza Pizza Royalty is:

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

0.087 = CA$31m ÷ (CA$362m - CA$2.4m) (Based on the trailing twelve months to December 2020).

Therefore, Pizza Pizza Royalty has an ROCE of 8.7%. On its own, that's a low figure but it's around the 7.3% average generated by the Hospitality industry.

View our latest analysis for Pizza Pizza Royalty

Above you can see how the current ROCE for Pizza Pizza Royalty 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 Pizza Pizza Royalty here for free.

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for Pizza Pizza Royalty's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Pizza Pizza Royalty in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

The Key Takeaway

We can conclude that in regards to Pizza Pizza Royalty's returns on capital employed and the trends, there isn't much change to report on. Unsurprisingly, the stock has only gained 6.4% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Like most companies, Pizza Pizza Royalty does come with some risks, and we've found 1 warning sign that you should be aware of.

While Pizza Pizza Royalty may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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