Brinker International's (NYSE:EAT) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Brinker International (NYSE:EAT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. To calculate this metric for Brinker International, this is the formula:

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

0.085 = US$161m ÷ (US$2.5b - US$586m) (Based on the trailing twelve months to March 2023).

So, Brinker International has an ROCE of 8.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.0%.

Check out our latest analysis for Brinker International

In the above chart we have measured Brinker International's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Brinker International.

What Does the ROCE Trend For Brinker International Tell Us?

On the surface, the trend of ROCE at Brinker International doesn't inspire confidence. Around five years ago the returns on capital were 30%, but since then they've fallen to 8.5%. However it looks like Brinker International might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Brinker International's ROCE

To conclude, we've found that Brinker International is reinvesting in the business, but returns have been falling. Since the stock has declined 16% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Brinker International does have some risks though, and we've spotted 4 warning signs for Brinker International that you might be interested in.

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.