Returns On Capital At Noodles (NASDAQ:NDLS) Paint A Concerning Picture

When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within Noodles (NASDAQ:NDLS), we weren't too hopeful.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Noodles, this is the formula:

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

0.011 = US$3.1m ÷ (US$346m - US$71m) (Based on the trailing twelve months to July 2024).

So, Noodles has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 10%.

Check out our latest analysis for Noodles

Above you can see how the current ROCE for Noodles compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Noodles .

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Noodles. Unfortunately the returns on capital have diminished from the 3.0% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Noodles becoming one if things continue as they have.

Our Take On Noodles' ROCE

In summary, it's unfortunate that Noodles is generating lower returns from the same amount of capital. This could explain why the stock has sunk a total of 74% in the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Noodles does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.

While Noodles 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.