Stock Analysis

Chefs' Warehouse (NASDAQ:CHEF) May Have Issues Allocating Its Capital

NasdaqGS:CHEF
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Although, when we looked at Chefs' Warehouse (NASDAQ:CHEF), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Chefs' Warehouse is:

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

0.012 = US$11m ÷ (US$1.1b - US$197m) (Based on the trailing twelve months to December 2021).

Thus, Chefs' Warehouse has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 9.4%.

See our latest analysis for Chefs' Warehouse

roce
NasdaqGS:CHEF Return on Capital Employed March 22nd 2022

Above you can see how the current ROCE for Chefs' Warehouse 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 Chefs' Warehouse here for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Chefs' Warehouse, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.9% over the last five years. 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. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Chefs' Warehouse's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Chefs' Warehouse is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 120% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Chefs' Warehouse could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Chefs' Warehouse is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.