Returns On Capital At Domino's Pizza Group (LON:DOM) Have Stalled

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So while Domino's Pizza Group (LON:DOM) has a high ROCE right now, lets see what we can decipher from how returns are changing.

Understanding 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. To calculate this metric for Domino's Pizza Group, this is the formula:

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).

So, 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 7.0%.

Check out 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

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

There hasn't been much to report for Domino's Pizza Group's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. Although current returns are high, we'd need more evidence of underlying growth for it to look like a multi-bagger going forward. With fewer investment opportunities, it makes sense that Domino's Pizza Group has been paying out a decent 50% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

Our Take On 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 59% 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 final note, you should learn about the 5 warning signs we've spotted with Domino's Pizza Group (including 3 which are concerning) .

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.