J D Wetherspoon (LON:JDW) Has More To Do To Multiply In Value Going Forward

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at J D Wetherspoon (LON:JDW) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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 J D Wetherspoon:

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

0.091 = UK£142m ÷ (UK£1.9b - UK£335m) (Based on the trailing twelve months to January 2024).

Thus, J D Wetherspoon has an ROCE of 9.1%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 7.3%.

View 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 analyst report for J D Wetherspoon .

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at J D Wetherspoon. Over the past five years, ROCE has remained relatively flat at around 9.1% and the business has deployed 34% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On J D Wetherspoon's ROCE

As we've seen above, J D Wetherspoon's returns on capital haven't increased but it is reinvesting in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 45% in the last five years. Therefore based on the analysis done in this article, we don't think J D Wetherspoon has the makings of a multi-bagger.

Like most companies, J D Wetherspoon does come with some risks, and we've found 3 warning signs that you should be aware of.

While J D Wetherspoon isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.