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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Chefs' Warehouse (NASDAQ:CHEF) looks quite promising in regards to its trends of return on capital.
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. To calculate this metric for Chefs' Warehouse, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.091 = US$122m ÷ (US$1.8b - US$429m) (Based on the trailing twelve months to September 2024).
So, Chefs' Warehouse has an ROCE of 9.1%. On its own, that's a low figure but it's around the 11% average generated by the Consumer Retailing industry.
Check out our latest analysis for Chefs' Warehouse
In the above chart we have measured Chefs' Warehouse'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 analyst report for Chefs' Warehouse .
So How Is Chefs' Warehouse's ROCE Trending?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 9.1%. The amount of capital employed has increased too, by 79%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
What We Can Learn From Chefs' Warehouse's ROCE
In summary, it's great to see that Chefs' Warehouse can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has only returned 40% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.
One more thing: We've identified 2 warning signs with Chefs' Warehouse (at least 1 which is significant) , and understanding these would certainly be useful.