If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. In light of that, when we looked at Driven Brands Holdings (NASDAQ:DRVN) and its ROCE trend, we weren't exactly thrilled.
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. The formula for this calculation on Driven Brands Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = US$269m ÷ (US$5.9b - US$424m) (Based on the trailing twelve months to March 2022).
Thus, Driven Brands Holdings has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 8.0%.
Above you can see how the current ROCE for Driven Brands Holdings 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.
What Can We Tell From Driven Brands Holdings' ROCE Trend?
The returns on capital haven't changed much for Driven Brands Holdings in recent years. Over the past three years, ROCE has remained relatively flat at around 4.9% and the business has deployed 308% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
What We Can Learn From Driven Brands Holdings' ROCE
As we've seen above, Driven Brands Holdings' returns on capital haven't increased but it is reinvesting in the business. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Driven Brands Holdings has the makings of a multi-bagger.
If you'd like to know more about Driven Brands Holdings, we've spotted 2 warning signs, and 1 of them can't be ignored.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.