Returns At Wendy's (NASDAQ:WEN) Appear To Be Weighed Down

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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 Wendy's (NASDAQ:WEN), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Wendy's:

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

0.066 = US$336m ÷ (US$5.5b - US$388m) (Based on the trailing twelve months to January 2023).

Therefore, Wendy's has an ROCE of 6.6%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 9.8%.

Check out our latest analysis for Wendy's

Above you can see how the current ROCE for Wendy's 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 Wendy's.

What Can We Tell From Wendy's' ROCE Trend?

In terms of Wendy's' historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 6.6% and the business has deployed 32% more capital into its operations. 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.

What We Can Learn From Wendy's' ROCE

In summary, Wendy's has simply been reinvesting capital and generating the same low rate of return as before. And with the stock having returned a mere 32% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing: We've identified 2 warning signs with Wendy's (at least 1 which is potentially serious) , and understanding these would certainly be useful.

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

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.