BT Brands (NASDAQ:BTBD) Might Be Having Difficulty Using Its Capital Effectively

There are a few key trends to look for if we want to identify the next 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at BT Brands (NASDAQ:BTBD) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for BT Brands:

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

0.0072 = US$105k ÷ (US$16m - US$1.2m) (Based on the trailing twelve months to October 2022).

So, BT Brands has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 10%.

View our latest analysis for BT Brands

Historical performance is a great place to start when researching a stock so above you can see the gauge for BT Brands' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of BT Brands, check out these free graphs here.

SWOT Analysis for BT Brands

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at BT Brands doesn't inspire confidence. To be more specific, ROCE has fallen from 2.4% over the last four years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, BT Brands has done well to pay down its current liabilities to 7.8% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for BT Brands. And the stock has followed suit returning a meaningful 9.9% to shareholders over the last year. 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.

One more thing to note, we've identified 2 warning signs with BT Brands and understanding them should be part of your investment process.

While BT Brands 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.