Investors Could Be Concerned With Dutch Bros' (NYSE:BROS) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Dutch Bros (NYSE:BROS), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Dutch Bros:

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

0.047 = US$106m ÷ (US$2.4b - US$180m) (Based on the trailing twelve months to September 2024).

Therefore, Dutch Bros has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.3%.

View our latest analysis for Dutch Bros

In the above chart we have measured Dutch Bros' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Dutch Bros .

What Does the ROCE Trend For Dutch Bros Tell Us?

We weren't thrilled with the trend because Dutch Bros' ROCE has reduced by 45% over the last four years, while the business employed 1,126% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Dutch Bros 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.

On a related note, Dutch Bros has decreased its current liabilities to 7.4% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Dutch Bros. In light of this, the stock has only gained 21% over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you're still interested in Dutch Bros it's worth checking out our FREE intrinsic value approximation for BROS to see if it's trading at an attractive price in other respects.

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.