Here's What's Concerning About Krispy Kreme's (NASDAQ:DNUT) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Having said that, from a first glance at Krispy Kreme (NASDAQ:DNUT) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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 Krispy Kreme is:

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

0.0078 = US$21m ÷ (US$3.2b - US$525m) (Based on the trailing twelve months to October 2023).

Therefore, Krispy Kreme has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 9.2%.

See our latest analysis for Krispy Kreme

In the above chart we have measured Krispy Kreme'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 Krispy Kreme.

What Can We Tell From Krispy Kreme's ROCE Trend?

When we looked at the ROCE trend at Krispy Kreme, we didn't gain much confidence. To be more specific, ROCE has fallen from 2.2% over the last five years. However it looks like Krispy Kreme 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 may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Krispy Kreme's ROCE

In summary, Krispy Kreme is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 40% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Krispy Kreme could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Krispy Kreme 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.