Returns On Capital Are Showing Encouraging Signs At CAVA Group (NYSE:CAVA)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at CAVA Group (NYSE:CAVA) and its trend of ROCE, we really liked what we saw.

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

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 CAVA Group:

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

0.046 = US$43m ÷ (US$1.1b - US$134m) (Based on the trailing twelve months to October 2024).

Thus, CAVA Group has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 9.1%.

See our latest analysis for CAVA Group

Above you can see how the current ROCE for CAVA Group 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 CAVA Group for free.

How Are Returns Trending?

The fact that CAVA Group is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses two years ago, but now it's earning 4.6% which is a sight for sore eyes. In addition to that, CAVA Group is employing 83% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Bottom Line

Overall, CAVA Group gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 150% total return over the last year tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 1 warning sign for CAVA Group you'll probably want to know about.

While CAVA Group 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.