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What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Dutch Bros (NYSE:BROS), it didn't seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Dutch Bros, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = US$52m ÷ (US$1.6b - US$121m) (Based on the trailing twelve months to September 2023).
Therefore, Dutch Bros has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.2%.
See our latest analysis for Dutch Bros
In the above chart we have measured Dutch Bros' 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 Can We Tell From Dutch Bros' ROCE Trend?
On the surface, the trend of ROCE at Dutch Bros doesn't inspire confidence. To be more specific, ROCE has fallen from 8.6% over the last three years. 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.
On a side note, Dutch Bros has done well to pay down its current liabilities to 7.4% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
Our Take On Dutch Bros' ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Dutch Bros is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 20% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.