Is Ruth's Hospitality Group (NASDAQ:RUTH) Likely To Turn Things Around?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Ruth's Hospitality Group (NASDAQ:RUTH), we don't think it's current trends fit the mold of a multi-bagger.

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 Ruth's Hospitality Group, this is the formula:

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

0.0038 = US$1.7m ÷ (US$553m - US$98m) (Based on the trailing twelve months to September 2020).

Therefore, Ruth's Hospitality Group has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 4.6%.

See our latest analysis for Ruth's Hospitality Group

Above you can see how the current ROCE for Ruth's Hospitality Group 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 report for Ruth's Hospitality Group.

The Trend Of ROCE

When we looked at the ROCE trend at Ruth's Hospitality Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.4% from 34% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Ruth's Hospitality Group has decreased its current liabilities to 18% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Ruth's Hospitality Group's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Ruth's Hospitality Group have fallen, meanwhile the business is employing more capital than it was five years ago. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Ruth's Hospitality Group does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...

While Ruth's Hospitality Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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