Speciality Restaurants (NSE:SPECIALITY) Is Looking To Continue Growing Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Speaking of which, we noticed some great changes in Speciality Restaurants' (NSE:SPECIALITY) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Speciality Restaurants is:

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

0.068 = ₹173m ÷ (₹3.2b - ₹715m) (Based on the trailing twelve months to December 2021).

Thus, Speciality Restaurants has an ROCE of 6.8%. On its own that's a low return, but compared to the average of 5.3% generated by the Hospitality industry, it's much better.

Check out our latest analysis for Speciality Restaurants

Historical performance is a great place to start when researching a stock so above you can see the gauge for Speciality Restaurants' ROCE against it's prior returns. If you're interested in investigating Speciality Restaurants' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Speciality Restaurants' ROCE Trend?

Shareholders will be relieved that Speciality Restaurants has broken into profitability. The company now earns 6.8% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Speciality Restaurants has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

The Key Takeaway

In summary, we're delighted to see that Speciality Restaurants has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One final note, you should learn about the 4 warning signs we've spotted with Speciality Restaurants (including 1 which is potentially serious) .

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.