In This Article:
What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Burger Fuel Group (NZSE:BFG) and its trend of ROCE, we really liked what we saw.
Understanding 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. To calculate this metric for Burger Fuel Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = NZ$1.8m ÷ (NZ$33m - NZ$4.1m) (Based on the trailing twelve months to September 2024).
Therefore, Burger Fuel Group has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.2%.
See our latest analysis for Burger Fuel Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Burger Fuel Group's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Burger Fuel Group.
What Can We Tell From Burger Fuel Group's ROCE Trend?
You'd find it hard not to be impressed with the ROCE trend at Burger Fuel Group. The data shows that returns on capital have increased by 48% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 30% less capital than it was five years ago. Burger Fuel Group may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
In Conclusion...
In the end, Burger Fuel Group has proven it's capital allocation skills are good with those higher returns from less amount of capital. Given the stock has declined 27% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.