The Return Trends At Chefs' Warehouse (NASDAQ:CHEF) Look Promising

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. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Chefs' Warehouse (NASDAQ:CHEF) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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 Chefs' Warehouse, this is the formula:

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

0.09 = US$118m ÷ (US$1.7b - US$400m) (Based on the trailing twelve months to June 2024).

Therefore, Chefs' Warehouse has an ROCE of 9.0%. Even though it's in line with the industry average of 9.2%, it's still a low return by itself.

Check out our latest analysis for Chefs' Warehouse

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 analyst report for Chefs' Warehouse .

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

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 five years, returns on capital employed have risen substantially to 9.0%. Basically the business is earning more per dollar of capital invested and in addition to that, 78% more capital is being employed now too. So we're very much inspired by what we're seeing at Chefs' Warehouse thanks to its ability to profitably reinvest capital.

Our Take On Chefs' Warehouse's ROCE

In summary, it's great to see that Chefs' Warehouse 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. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. So researching this company further and determining whether or not these trends will continue seems justified.

If you'd like to know about the risks facing Chefs' Warehouse, we've discovered 1 warning sign that 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.