Wingstop (NASDAQ:WING) Is Reinvesting At Lower Rates Of Return

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Wingstop (NASDAQ:WING), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Wingstop:

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

0.26 = US$93m ÷ (US$424m - US$62m) (Based on the trailing twelve months to December 2022).

Thus, Wingstop has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 9.8%.

Check out our latest analysis for Wingstop

Above you can see how the current ROCE for Wingstop compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Wingstop here for free.

What Does the ROCE Trend For Wingstop Tell Us?

When we looked at the ROCE trend at Wingstop, we didn't gain much confidence. While it's comforting that the ROCE is high, five years ago it was 34%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Wingstop's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Wingstop is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 325% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Wingstop does have some risks, we noticed 3 warning signs (and 2 which shouldn't be ignored) we think you should know about.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.