Domino's Pizza Group (LON:DOM) Might Become A Compounding Machine

What trends should we look for it we want to identify stocks that can 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. Ergo, when we looked at the ROCE trends at Domino's Pizza Group (LON:DOM), we liked what we saw.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Domino's Pizza Group is:

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

0.30 = UK£112m ÷ (UK£513m - UK£143m) (Based on the trailing twelve months to December 2023).

Thus, Domino's Pizza Group has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 7.5%.

View our latest analysis for Domino's Pizza Group

In the above chart we have measured Domino's Pizza Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Domino's Pizza Group .

What Can We Tell From Domino's Pizza Group's ROCE Trend?

It's hard not to be impressed by Domino's Pizza Group's returns on capital. The company has consistently earned 30% for the last five years, and the capital employed within the business has risen 36% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.

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

In summary, we're delighted to see that Domino's Pizza Group has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. Therefore it's no surprise that shareholders have earned a respectable 46% return if they held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Domino's Pizza Group (of which 2 don't sit too well with us!) that you should know about.

Domino's Pizza Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com