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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Dutch Bros (NYSE:BROS), it didn't seem to tick all of these boxes.
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. Analysts use this formula to calculate it for Dutch Bros:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.047 = US$106m ÷ (US$2.4b - US$180m) (Based on the trailing twelve months to September 2024).
So, Dutch Bros has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.1%.
Check out our latest analysis for Dutch Bros
Above you can see how the current ROCE for Dutch Bros compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Dutch Bros .
What The Trend Of ROCE Can Tell Us
The trend of ROCE doesn't look fantastic because it's fallen from 8.6% four years ago, while the business's capital employed increased by 1,126%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Dutch Bros' earnings and if they change as a result from the capital raise.
On a side note, Dutch Bros has done well to pay down its current liabilities to 7.4% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
Our Take On Dutch Bros' ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Dutch Bros is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 42% over the last three years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.