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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at Restaurant Brands New Zealand (NZSE:RBD), it didn't seem to tick all of these boxes.
Understanding 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 Restaurant Brands New Zealand, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.071 = NZ$84m ÷ (NZ$1.3b - NZ$144m) (Based on the trailing twelve months to December 2021).
Therefore, Restaurant Brands New Zealand has an ROCE of 7.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.9%.
See 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'd like, you can check out the forecasts from the analysts covering Restaurant Brands New Zealand here for free.
What Can We Tell From Restaurant Brands New Zealand's ROCE Trend?
In terms of Restaurant Brands New Zealand's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.1% from 17% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Key Takeaway
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Restaurant Brands New Zealand. Furthermore the stock has climbed 88% over the last five 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.
On a final note, we found 2 warning signs for Restaurant Brands New Zealand (1 makes us a bit uncomfortable) you should be aware of.