RAVE Restaurant Group (NASDAQ:RAVE) Is Looking To Continue Growing 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? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, RAVE Restaurant Group (NASDAQ:RAVE) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

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)

0.058 = US$598k ÷ (US$12m - US$2.2m) (Based on the trailing twelve months to March 2021).

Therefore, RAVE Restaurant Group has an ROCE of 5.8%. On its own, that's a low figure but it's around the 5.0% 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 want to delve into the historical earnings, revenue and cash flow of RAVE Restaurant Group, check out these free graphs here.

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

It's great to see that RAVE Restaurant Group has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 29% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

The Key Takeaway

From what we've seen above, RAVE Restaurant Group has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 59% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to know some of the risks facing RAVE Restaurant Group we've found 5 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

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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This article by Simply Wall St is general in nature. 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.
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