Cracker Barrel Old Country Store (NASDAQ:CBRL) May Have Issues Allocating Its Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Cracker Barrel Old Country Store (NASDAQ:CBRL), it didn't seem to tick all of these boxes.

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)

0.074 = US$134m ÷ (US$2.3b - US$470m) (Based on the trailing twelve months to October 2022).

Therefore, Cracker Barrel Old Country Store has an ROCE of 7.4%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 11%.

See our latest analysis for Cracker Barrel Old Country Store

Above you can see how the current ROCE for Cracker Barrel Old Country Store compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Cracker Barrel Old Country Store Tell Us?

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 7.4% from 27% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Cracker Barrel Old Country Store's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Cracker Barrel Old Country Store. And there could be an opportunity here if other metrics look good too, because the stock has declined 24% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Cracker Barrel Old Country Store does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Cracker Barrel Old Country Store may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.