J D Wetherspoon's (LON:JDW) Returns Have Hit A Wall

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. In light of that, when we looked at J D Wetherspoon (LON:JDW) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for J D Wetherspoon, this is the formula:

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).

Therefore, J D Wetherspoon has an ROCE of 9.1%. In absolute terms, that's a low return but it's around the Hospitality industry average of 7.7%.

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 .

What Can We Tell From J D Wetherspoon's ROCE Trend?

The returns on capital haven't changed much for J D Wetherspoon in recent years. The company has consistently earned 9.1% for the last five years, and the capital employed within the business has risen 34% in that time. 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.

The Bottom Line On J D Wetherspoon's ROCE

In summary, J D Wetherspoon has simply been reinvesting capital and generating the same low rate of return as before. And in the last five years, the stock has given away 52% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

J D Wetherspoon does have some risks, we noticed 4 warning signs (and 1 which can't be ignored) we think you should know about.

While J D Wetherspoon may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.