Driven Brands Holdings' (NASDAQ:DRVN) Returns On Capital Are Heading Higher

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. So when we looked at Driven Brands Holdings (NASDAQ:DRVN) and its trend of ROCE, we really liked what we saw.

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

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 Driven Brands Holdings, this is the formula:

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

0.059 = US$317m ÷ (US$5.9b - US$475m) (Based on the trailing twelve months to September 2023).

Therefore, Driven Brands Holdings has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 9.1%.

Check out our latest analysis for Driven Brands Holdings

Above you can see how the current ROCE for Driven Brands Holdings 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 Driven Brands Holdings here for free.

So How Is Driven Brands Holdings' ROCE Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last four years, returns on capital employed have risen substantially to 5.9%. Basically the business is earning more per dollar of capital invested and in addition to that, 239% more capital is being employed now too. So we're very much inspired by what we're seeing at Driven Brands Holdings thanks to its ability to profitably reinvest capital.

What We Can Learn From Driven Brands Holdings' ROCE

In summary, it's great to see that Driven Brands Holdings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Given the stock has declined 50% in the last year, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

While Driven Brands Holdings looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether DRVN is currently trading for a fair price.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.