Speed Rabbit Pizza (EPA:MLSRP) Is Reinvesting At Lower Rates Of Return

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 Speed Rabbit Pizza (EPA:MLSRP) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Speed Rabbit Pizza is:

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

0.02 = €320k ÷ (€16m - €480k) (Based on the trailing twelve months to December 2023).

Thus, Speed Rabbit Pizza has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 8.1%.

See our latest analysis for Speed Rabbit Pizza

Historical performance is a great place to start when researching a stock so above you can see the gauge for Speed Rabbit Pizza's ROCE against it's prior returns. If you're interested in investigating Speed Rabbit Pizza's past further, check out this free graph covering Speed Rabbit Pizza's past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Speed Rabbit Pizza doesn't inspire confidence. To be more specific, ROCE has fallen from 7.4% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Speed Rabbit Pizza's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Speed Rabbit Pizza is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 496% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know more about Speed Rabbit Pizza, we've spotted 5 warning signs, and 3 of them make us uncomfortable.

While Speed Rabbit Pizza 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.