Be Wary Of J D Wetherspoon (LON:JDW) And Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at J D Wetherspoon (LON:JDW), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for J D Wetherspoon:

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

0.035 = UK£57m ÷ (UK£2.0b - UK£313m) (Based on the trailing twelve months to January 2023).

So, J D Wetherspoon has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 6.3%.

See our latest analysis for J D Wetherspoon

Above you can see how the current ROCE for J D Wetherspoon compares to its prior returns on capital, but there's only so much you can tell from the past. 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 J D Wetherspoon's ROCE Trend?

On the surface, the trend of ROCE at J D Wetherspoon doesn't inspire confidence. To be more specific, ROCE has fallen from 12% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On J D Wetherspoon's ROCE

While returns have fallen for J D Wetherspoon in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 41% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

J D Wetherspoon does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.