There Are Reasons To Feel Uneasy About J D Wetherspoon's (LON:JDW) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think J D Wetherspoon (LON:JDW) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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 J D Wetherspoon:

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

0.012 = UK£21m ÷ (UK£2.0b - UK£339m) (Based on the trailing twelve months to July 2022).

Therefore, J D Wetherspoon has an ROCE of 1.2%. 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'd like, you can check out the forecasts from the analysts covering J D Wetherspoon here for free.

What Does the ROCE Trend For J D Wetherspoon Tell Us?

When we looked at the ROCE trend at J D Wetherspoon, we didn't gain much confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 1.2%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From J D Wetherspoon's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that J D Wetherspoon is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 61% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we found 2 warning signs for J D Wetherspoon (1 shouldn't be ignored) you should be aware of.

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.