ONE Group Hospitality's (NASDAQ:STKS) Returns Have Hit A Wall

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating ONE Group Hospitality (NASDAQ:STKS), we don't think it's current trends fit the mold of a multi-bagger.

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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 ONE Group Hospitality, this is the formula:

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

0.042 = US$35m ÷ (US$959m - US$131m) (Based on the trailing twelve months to December 2024).

So, ONE Group Hospitality has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.8%.

See 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.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at ONE Group Hospitality. The company has employed 364% more capital in the last five years, and the returns on that capital have remained stable at 4.2%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On ONE Group Hospitality's ROCE

As we've seen above, ONE Group Hospitality's returns on capital haven't increased but it is reinvesting in the business. Yet to long term shareholders the stock has gifted them an incredible 154% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to know some of the risks facing ONE Group Hospitality we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

While ONE Group Hospitality 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. 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.