To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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)?
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 Chefs' Warehouse is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0092 = US$8.4m ÷ (US$1.0b - US$122m) (Based on the trailing twelve months to June 2020).
So, Chefs' Warehouse has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 9.6%.
In the above chart we have a measured Chefs' Warehouse's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Chefs' Warehouse.
What The Trend Of ROCE Can Tell Us
Unfortunately, the trend isn't great with ROCE falling from 5.9% five years ago, while capital employed has grown 81%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Chefs' Warehouse might not have received a full period of earnings contribution from it.
The Bottom Line On Chefs' Warehouse's ROCE
Bringing it all together, while we're somewhat encouraged by Chefs' Warehouse's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 20% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
One final note, you should learn about the 3 warning signs we've spotted with Chefs' Warehouse (including 1 which is is concerning) .
While Chefs' Warehouse may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. 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.
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