First Watch Restaurant Group (NASDAQ:FWRG) Shareholders Will Want The ROCE Trajectory To Continue

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, First Watch Restaurant Group (NASDAQ:FWRG) looks quite promising in regards to its trends of return on capital.

We've discovered 2 warning signs about First Watch Restaurant Group. View them for free.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on First Watch Restaurant Group is:

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

0.032 = US$44m ÷ (US$1.5b - US$138m) (Based on the trailing twelve months to December 2024).

So, First Watch Restaurant Group has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 10.0%.

View our latest analysis for First Watch Restaurant Group

In the above chart we have measured First Watch Restaurant Group'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 First Watch Restaurant Group .

What Does the ROCE Trend For First Watch Restaurant Group Tell Us?

We're delighted to see that First Watch Restaurant Group is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 3.2% on its capital. In addition to that, First Watch Restaurant Group is employing 51% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Our Take On First Watch Restaurant Group's ROCE

Long story short, we're delighted to see that First Watch Restaurant Group's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a solid 60% to shareholders over the last three years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 2 warning signs with First Watch Restaurant Group and understanding them should be part of your investment process.

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.