Investors Should Be Encouraged By Chipotle Mexican Grill's (NYSE:CMG) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 the ROCE trend of Chipotle Mexican Grill (NYSE:CMG) we really liked what we saw.

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. To calculate this metric for Chipotle Mexican Grill, this is the formula:

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

0.22 = US$1.7b ÷ (US$8.4b - US$997m) (Based on the trailing twelve months to March 2024).

So, Chipotle Mexican Grill has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 11%.

See our latest analysis for Chipotle Mexican Grill

Above you can see how the current ROCE for Chipotle Mexican Grill compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Chipotle Mexican Grill .

What Does the ROCE Trend For Chipotle Mexican Grill Tell Us?

The trends we've noticed at Chipotle Mexican Grill are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 22%. Basically the business is earning more per dollar of capital invested and in addition to that, 83% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Key Takeaway

All in all, it's terrific to see that Chipotle Mexican Grill is reaping the rewards from prior investments and is growing its capital base. And a remarkable 287% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Chipotle Mexican Grill can keep these trends up, it could have a bright future ahead.

Chipotle Mexican Grill does have some risks though, and we've spotted 1 warning sign for Chipotle Mexican Grill that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com