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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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Restaurant Brands New Zealand (NZSE:RBD), we don't think it's current trends fit the mold of a multi-bagger.
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 Restaurant Brands New Zealand:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.071 = NZ$76m ÷ (NZ$1.4b - NZ$349m) (Based on the trailing twelve months to June 2022).
Thus, Restaurant Brands New Zealand has an ROCE of 7.1%. On its own, that's a low figure but it's around the 7.5% average generated by the Hospitality industry.
View our latest analysis for Restaurant Brands New Zealand
Above you can see how the current ROCE for Restaurant Brands New Zealand 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.
The Trend Of ROCE
On the surface, the trend of ROCE at Restaurant Brands New Zealand doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 7.1%. However it looks like Restaurant Brands New Zealand might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On Restaurant Brands New Zealand's ROCE
In summary, Restaurant Brands New Zealand is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 16% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
On a final note, we found 3 warning signs for Restaurant Brands New Zealand (2 are concerning) you should be aware of.