Speed Rabbit Pizza (EPA:MLSRP) May Have Issues Allocating Its Capital

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Speed Rabbit Pizza (EPA:MLSRP) and its ROCE trend, we weren't exactly thrilled.

Our free stock report includes 5 warning signs investors should be aware of before investing in Speed Rabbit Pizza. Read for free now.

What Is 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. Analysts use this formula to calculate it for Speed Rabbit Pizza:

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).

So, Speed Rabbit Pizza has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 8.3%.

Check out our latest analysis for Speed Rabbit Pizza

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 Speed Rabbit Pizza's past further, check out this free graph covering Speed Rabbit Pizza's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Speed Rabbit Pizza's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.0% from 7.4% five years ago. 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.

Our Take On Speed Rabbit Pizza's 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 Speed Rabbit Pizza. And long term investors must be optimistic going forward because the stock has returned a huge 142% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Speed Rabbit Pizza does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those are a bit unpleasant...

While Speed Rabbit Pizza 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.