ONE Group Hospitality (NASDAQ:STKS) Will Want To Turn Around Its Return Trends

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at ONE Group Hospitality (NASDAQ:STKS), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for ONE Group Hospitality:

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

0.028 = US$23m ÷ (US$953m - US$123m) (Based on the trailing twelve months to September 2024).

Thus, ONE Group Hospitality has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.0%.

Check out our latest analysis for ONE Group Hospitality

In the above chart we have measured ONE Group Hospitality's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering ONE Group Hospitality for free.

The Trend Of ROCE

We weren't thrilled with the trend because ONE Group Hospitality's ROCE has reduced by 69% over the last five years, while the business employed 915% more capital. Usually this isn't ideal, but given ONE Group Hospitality conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. ONE Group Hospitality probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

What We Can Learn From ONE Group Hospitality's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that ONE Group Hospitality is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 19% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

ONE Group Hospitality does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.