If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in Biglari Holdings' (NYSE:BH.A) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Biglari Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = US$43m ÷ (US$827m - US$142m) (Based on the trailing twelve months to September 2023).
Therefore, Biglari Holdings has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.1%.
See our latest analysis for Biglari Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Biglari Holdings' ROCE against it's prior returns. If you're interested in investigating Biglari Holdings' past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
Like most people, we're pleased that Biglari Holdings is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Biglari Holdings is using 20% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Biglari Holdings could be selling under-performing assets since the ROCE is improving.
The Bottom Line On Biglari Holdings' ROCE
From what we've seen above, Biglari Holdings has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has only returned 19% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
On a final note, we found 2 warning signs for Biglari Holdings (1 is concerning) you should be aware of.
While Biglari Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.