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There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Ergo, when we looked at the ROCE trends at Chipotle Mexican Grill (NYSE:CMG), we liked what we saw.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Chipotle Mexican Grill, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = US$1.5b ÷ (US$7.9b - US$1.1b) (Based on the trailing twelve months to September 2023).
Thus, Chipotle Mexican Grill has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 9.1% earned by companies in a similar industry.
See our latest analysis for Chipotle Mexican Grill
Above you can see how the current ROCE for Chipotle Mexican Grill 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 report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
In terms of Chipotle Mexican Grill's history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 22% and the business has deployed 273% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.
The Bottom Line
Chipotle Mexican Grill has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And the stock has done incredibly well with a 476% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
If you want to continue researching Chipotle Mexican Grill, you might be interested to know about the 1 warning sign that our analysis has discovered.