Return Trends At Domino's Pizza Group (LON:DOM) Aren't Appealing

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Looking at Domino's Pizza Group (LON:DOM), it does have a high ROCE right now, but lets see how returns are trending.

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. Analysts use this formula to calculate it for Domino's Pizza Group:

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

0.32 = UK£107m ÷ (UK£478m - UK£146m) (Based on the trailing twelve months to June 2023).

Thus, Domino's Pizza Group has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 6.3%.

Check out our latest analysis for Domino's Pizza Group

Above you can see how the current ROCE for Domino's Pizza Group 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 Domino's Pizza Group here for free.

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

Things have been pretty stable at Domino's Pizza Group, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So it may not be a multi-bagger in the making, but given the decent 32% return on capital, it'd be difficult to find fault with the business's current operations. This probably explains why Domino's Pizza Group is paying out 54% of its income to shareholders in the form of dividends. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

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

In summary, Domino's Pizza Group isn't compounding its earnings but is generating decent returns on the same amount of capital employed. Since the stock has gained an impressive 60% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing: We've identified 5 warning signs with Domino's Pizza Group (at least 3 which can't be ignored) , and understanding them would certainly be useful.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.