Returns On Capital At BJ's Restaurants (NASDAQ:BJRI) Paint A Concerning Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think BJ's Restaurants (NASDAQ:BJRI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on BJ's Restaurants is:

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

0.025 = US$21m ÷ (US$1.0b - US$183m) (Based on the trailing twelve months to October 2023).

So, BJ's Restaurants has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 9.2%.

Check out our latest analysis for BJ's Restaurants

In the above chart we have measured BJ's Restaurants' 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 BJ's Restaurants.

What Does the ROCE Trend For BJ's Restaurants Tell Us?

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 2.5% from 11% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From BJ's Restaurants' ROCE

Bringing it all together, while we're somewhat encouraged by BJ's Restaurants' reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 32% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing BJ's Restaurants, we've discovered 1 warning sign that you should be aware of.

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.

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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.