Cracker Barrel Old Country Store (NASDAQ:CBRL) Could Be Struggling To Allocate Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Cracker Barrel Old Country Store (NASDAQ:CBRL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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 Cracker Barrel Old Country Store is:

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

0.07 = US$122m ÷ (US$2.2b - US$462m) (Based on the trailing twelve months to October 2023).

So, Cracker Barrel Old Country Store has an ROCE of 7.0%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.1%.

See our latest analysis for Cracker Barrel Old Country Store

In the above chart we have measured Cracker Barrel Old Country Store'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 Cracker Barrel Old Country Store.

How Are Returns Trending?

In terms of Cracker Barrel Old Country Store's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.0% from 24% 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.

Our Take On Cracker Barrel Old Country Store's ROCE

Bringing it all together, while we're somewhat encouraged by Cracker Barrel Old Country Store's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 54% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Cracker Barrel Old Country Store has the makings of a multi-bagger.

If you want to know some of the risks facing Cracker Barrel Old Country Store we've found 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

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.