There Are Reasons To Feel Uneasy About Noodles' (NASDAQ:NDLS) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Noodles (NASDAQ:NDLS) and its ROCE trend, we weren't exactly thrilled.

What Is 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 Noodles, this is the formula:

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

0.033 = US$9.4m ÷ (US$349m - US$68m) (Based on the trailing twelve months to April 2023).

Therefore, Noodles has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.0%.

View 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, you can check out the forecasts from the analysts covering Noodles here for free.

What Does the ROCE Trend For Noodles Tell Us?

On the surface, the trend of ROCE at Noodles doesn't inspire confidence. Around five years ago the returns on capital were 4.5%, but since then they've fallen to 3.3%. However it looks like Noodles 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.

The Bottom Line On Noodles' ROCE

To conclude, we've found that Noodles is reinvesting in the business, but returns have been falling. Since the stock has declined 59% 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.

Noodles 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 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.