Can RAVE Restaurant Group (NASDAQ:RAVE) Continue To Grow Its Returns On Capital?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in RAVE Restaurant Group's (NASDAQ:RAVE) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for RAVE Restaurant Group, this is the formula:

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

0.033 = US$344k ÷ (US$13m - US$2.3m) (Based on the trailing twelve months to December 2020).

Therefore, RAVE Restaurant Group has an ROCE of 3.3%. On its own, that's a low figure but it's around the 3.7% average generated by the Hospitality industry.

View our latest analysis for RAVE Restaurant Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating RAVE Restaurant Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From RAVE Restaurant Group's ROCE Trend?

Like most people, we're pleased that RAVE Restaurant Group is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, RAVE Restaurant Group is using 32% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. RAVE Restaurant Group could be selling under-performing assets since the ROCE is improving.

What We Can Learn From RAVE Restaurant Group's ROCE

In summary, it's great to see that RAVE Restaurant Group has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has dived 72% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

If you'd like to know about the risks facing RAVE Restaurant Group, we've discovered 3 warning signs that you should be aware of.

While RAVE Restaurant Group 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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