To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 J D Wetherspoon (LON:JDW), we don't think it's current trends fit the mold of a multi-bagger.

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 J D Wetherspoon is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.035 = UK£57m ÷ (UK£2.0b - UK£313m) (Based on the trailing twelve months to January 2023).

Therefore, J D Wetherspoon has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 7.4%.

Check out our latest analysis for J D Wetherspoon

In the above chart we have measured J D Wetherspoon'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 report on analyst forecasts for the company.

What Does the ROCE Trend For J D Wetherspoon Tell Us?

On the surface, the trend of ROCE at J D Wetherspoon doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.5% from 12% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From J D Wetherspoon's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for J D Wetherspoon. However, despite the promising trends, the stock has fallen 48% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing: We've identified 3 warning signs with J D Wetherspoon (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.