BJ's Restaurants (NASDAQ:BJRI) Could Be Struggling To Allocate Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at BJ's Restaurants (NASDAQ:BJRI) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for BJ's Restaurants:

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

0.011 = US$9.7m ÷ (US$1.0b - US$190m) (Based on the trailing twelve months to April 2023).

Thus, BJ's Restaurants has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 9.0%.

Check out our latest analysis for BJ's Restaurants

Above you can see how the current ROCE for BJ's Restaurants 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 BJ's Restaurants.

So How Is BJ's Restaurants' ROCE Trending?

When we looked at the ROCE trend at BJ's Restaurants, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.1% from 8.5% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for BJ's Restaurants. And there could be an opportunity here if other metrics look good too, because the stock has declined 46% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to continue researching BJ's Restaurants, you might be interested to know about the 1 warning sign that our analysis has discovered.

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

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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.