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Shake Shack (NYSE:SHAK) Will Want To Turn Around Its Return Trends

Simply Wall St ·  12/01/2023 18:55

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Shake Shack (NYSE:SHAK) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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 Shake Shack, this is the formula:

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

0.0026 = US$3.7m ÷ (US$1.6b - US$152m) (Based on the trailing twelve months to September 2023).

So, Shake Shack has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.1%.

View our latest analysis for Shake Shack

roce
NYSE:SHAK Return on Capital Employed December 1st 2023

In the above chart we have measured Shake Shack'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 Shake Shack.

What Does the ROCE Trend For Shake Shack Tell Us?

In terms of Shake Shack's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 6.7%, but since then they've fallen to 0.3%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Shake Shack's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shake Shack. These trends are starting to be recognized by investors since the stock has delivered a 22% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

While Shake Shack 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 on our platform.

While Shake Shack 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.

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

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more
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