Returns On Capital Signal Difficult Times Ahead For Krispy Kreme (NASDAQ:DNUT)

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at Krispy Kreme (NASDAQ:DNUT), so let's see why.

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. To calculate this metric for Krispy Kreme, this is the formula:

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

0.0037 = US$9.6m ÷ (US$3.1b - US$475m) (Based on the trailing twelve months to September 2024).

Therefore, Krispy Kreme has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.4%.

Check out 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 analyst report for Krispy Kreme .

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Krispy Kreme. About five years ago, returns on capital were 1.6%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Krispy Kreme becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Krispy Kreme is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 37% over the last three years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 4 warning signs with Krispy Kreme (at least 2 which are a bit concerning) , and understanding these would certainly be useful.

While Krispy Kreme 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.