We Like These Underlying Return On Capital Trends At Red Robin Gourmet Burgers (NASDAQ:RRGB)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Red Robin Gourmet Burgers (NASDAQ:RRGB) so let's look a bit deeper.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

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. Analysts use this formula to calculate it for Red Robin Gourmet Burgers:

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

0.016 = US$6.5m ÷ (US$587m - US$185m) (Based on the trailing twelve months to July 2025).

Thus, Red Robin Gourmet Burgers has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 9.6%.

See our latest analysis for Red Robin Gourmet Burgers

Above you can see how the current ROCE for Red Robin Gourmet Burgers compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Red Robin Gourmet Burgers .

So How Is Red Robin Gourmet Burgers' ROCE Trending?

Like most people, we're pleased that Red Robin Gourmet Burgers is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 1.6% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 51% 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. This could potentially mean that the company is selling some of its assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 32% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

In Conclusion...

In the end, Red Robin Gourmet Burgers has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 50% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing to note, we've identified 2 warning signs with Red Robin Gourmet Burgers and understanding them should be part of your investment process.

While Red Robin Gourmet Burgers 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.