Here's What's Concerning About Cracker Barrel Old Country Store's (NASDAQ:CBRL) Returns On 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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. 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 Cracker Barrel Old Country Store (NASDAQ:CBRL) and its ROCE trend, we weren't exactly thrilled.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Cracker Barrel Old Country Store:

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

0.071 = US$126m ÷ (US$2.3b - US$471m) (Based on the trailing twelve months to January 2023).

Thus, Cracker Barrel Old Country Store has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.8%.

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

SWOT Analysis for Cracker Barrel Old Country Store

How Are Returns Trending?

On the surface, the trend of ROCE at Cracker Barrel Old Country Store doesn't inspire confidence. To be more specific, ROCE has fallen from 25% over the last five years. However it looks like Cracker Barrel Old Country Store might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

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 23% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Cracker Barrel Old Country Store (including 1 which is a bit unpleasant) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.