Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, the ROCE of Texas Roadhouse (NASDAQ:TXRH) looks decent, right now, so lets see what the trend of returns can tell us.
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. The formula for this calculation on Texas Roadhouse is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$340m ÷ (US$2.5b - US$561m) (Based on the trailing twelve months to September 2023).
So, Texas Roadhouse has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 9.2% it's much better.
Check out our latest analysis for Texas Roadhouse
In the above chart we have measured Texas Roadhouse'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 Texas Roadhouse.
The Trend Of ROCE
While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 17% and the business has deployed 89% more capital into its operations. Since 17% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The Key Takeaway
To sum it up, Texas Roadhouse has simply been reinvesting capital steadily, at those decent rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
If you'd like to know about the risks facing Texas Roadhouse, we've discovered 1 warning sign that you should be aware of.
While Texas Roadhouse 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.