Stock Analysis

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

NasdaqGS:CHEF
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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Chefs' Warehouse (NASDAQ:CHEF) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Chefs' Warehouse:

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

0.043 = US$39m ÷ (US$1.1b - US$194m) (Based on the trailing twelve months to March 2022).

Therefore, Chefs' Warehouse has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 8.5%.

See our latest analysis for Chefs' Warehouse

roce
NasdaqGS:CHEF Return on Capital Employed July 12th 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 to see what analysts are forecasting going forward, you should check out our free report for Chefs' Warehouse.

What Does the ROCE Trend For Chefs' Warehouse Tell Us?

In terms of Chefs' Warehouse's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 6.8% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Chefs' Warehouse's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Chefs' Warehouse. And the stock has done incredibly well with a 192% 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.

Like most companies, Chefs' Warehouse does come with some risks, and we've found 1 warning sign that you should be aware of.

While Chefs' Warehouse isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.