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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at J D Wetherspoon (LON:JDW) 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?
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 J D Wetherspoon:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.092 = UK£143m ÷ (UK£1.9b - UK£351m) (Based on the trailing twelve months to July 2024).
Thus, J D Wetherspoon has an ROCE of 9.2%. In absolute terms, that's a low return but it's around the Hospitality industry average of 7.9%.
View 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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for J D Wetherspoon .
So How Is J D Wetherspoon's ROCE Trending?
The returns on capital haven't changed much for J D Wetherspoon in recent years. The company has consistently earned 9.2% for the last five years, and the capital employed within the business has risen 30% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
What We Can Learn From J D Wetherspoon's ROCE
In conclusion, J D Wetherspoon has been investing more capital into the business, but returns on that capital haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 57% in the last five years. 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.
If you'd like to know more about J D Wetherspoon, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.