Investors Met With Slowing Returns on Capital At Hostess Brands (NASDAQ:TWNK)

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Hostess Brands (NASDAQ:TWNK), we don't think it's current trends fit the mold of a multi-bagger.

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 Hostess Brands:

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

0.068 = US$223m ÷ (US$3.5b - US$207m) (Based on the trailing twelve months to March 2023).

Thus, Hostess Brands has an ROCE of 6.8%. Ultimately, that's a low return and it under-performs the Food industry average of 9.7%.

View our latest analysis for Hostess Brands

Above you can see how the current ROCE for Hostess Brands 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 report on analyst forecasts for the company.

SWOT Analysis for Hostess Brands

How Are Returns Trending?

Over the past five years, Hostess Brands' ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Hostess Brands doesn't end up being a multi-bagger in a few years time.

In Conclusion...

In a nutshell, Hostess Brands has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has gained an impressive 91% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know about the risks facing Hostess Brands, we've discovered 1 warning sign that you should be aware of.

While Hostess Brands may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.