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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Wendy's (NASDAQ:WEN) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Wendy's:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.081 = US$377m ÷ (US$5.0b - US$398m) (Based on the trailing twelve months to December 2024).
So, Wendy's has an ROCE of 8.1%. On its own, that's a low figure but it's around the 9.8% average generated by the Hospitality industry.
See our latest analysis for Wendy's
In the above chart we have measured Wendy's' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Wendy's .
So How Is Wendy's' ROCE Trending?
Wendy's' ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 36% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Bottom Line On Wendy's' ROCE
In summary, we're delighted to see that Wendy's has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has only returned 33% 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 Wendy's (at least 1 which is concerning) , and understanding them would certainly be useful.
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.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.