In This Article:
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Having said that, from a first glance at Wendy's (NASDAQ:WEN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Wendy's is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.071 = US$355m ÷ (US$5.4b - US$400m) (Based on the trailing twelve months to April 2023).
So, Wendy's has an ROCE of 7.1%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 9.1%.
View our latest analysis for Wendy's
Above you can see how the current ROCE for Wendy's 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 Wendy's' historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 7.1% and the business has deployed 30% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
Our Take On Wendy's' ROCE
In conclusion, Wendy's has been investing more capital into the business, but returns on that capital haven't increased. Although the market must be expecting these trends to improve because the stock has gained 41% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
If you'd like to know more about Wendy's, we've spotted 2 warning signs, and 1 of them is a bit unpleasant.
While Wendy's isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.