To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Driven Brands Holdings (NASDAQ:DRVN), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Driven Brands Holdings is:

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

0.057 = US$311m ÷ (US$5.9b - US$427m) (Based on the trailing twelve months to December 2023).

Therefore, Driven Brands Holdings has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 10%.

In the above chart we have measured Driven Brands Holdings' 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 Driven Brands Holdings .

What Does the ROCE Trend For Driven Brands Holdings Tell Us?

The returns on capital haven't changed much for Driven Brands Holdings in recent years. The company has employed 350% more capital in the last five years, and the returns on that capital have remained stable at 5.7%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On Driven Brands Holdings' ROCE

In conclusion, Driven Brands Holdings has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has declined 41% over the last three years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

While Driven Brands Holdings doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for DRVN on our platform.

While Driven Brands Holdings 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.