If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Restaurant Brands International Limited Partnership (TSE:QSP.UN) 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?
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. Analysts use this formula to calculate it for Restaurant Brands International Limited Partnership:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.088 = US$1.9b ÷ (US$23b - US$1.8b) (Based on the trailing twelve months to September 2021).
Thus, Restaurant Brands International Limited Partnership has an ROCE of 8.8%. On its own, that's a low figure but it's around the 8.1% average generated by the Hospitality industry.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Restaurant Brands International Limited Partnership's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Restaurant Brands International Limited Partnership's ROCE Trending?
Over the past five years, Restaurant Brands International Limited Partnership's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Restaurant Brands International Limited Partnership to be a multi-bagger going forward.
The Bottom Line
In summary, Restaurant Brands International Limited Partnership isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And investors may be recognizing these trends since the stock has only returned a total of 29% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One more thing: We've identified 2 warning signs with Restaurant Brands International Limited Partnership (at least 1 which is a bit concerning) , and understanding them would certainly be useful.
While Restaurant Brands International Limited Partnership 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. 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.