Here's What To Make Of Driven Brands Holdings' (NASDAQ:DRVN) Decelerating Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. However, after briefly looking over the numbers, we don't think Driven Brands Holdings (NASDAQ:DRVN) 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?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Driven Brands Holdings is:

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

0.044 = US$206m ÷ (US$5.0b - US$337m) (Based on the trailing twelve months to September 2021).

Therefore, Driven Brands Holdings has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 8.6%.

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

In terms of Driven Brands Holdings' historical ROCE trend, it doesn't exactly demand attention. The company has employed 194% more capital in the last two years, and the returns on that capital have remained stable at 4.4%. 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.

In Conclusion...

Long story short, while Driven Brands Holdings has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly then, the total return to shareholders over the last year has been flat. Therefore based on the analysis done in this article, we don't think Driven Brands Holdings has the makings of a multi-bagger.

On a final note, we found 4 warning signs for Driven Brands Holdings (1 can't be ignored) you should be aware of.

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.