Here's What Nathan's Famous' (NASDAQ:NATH) Strong Returns On Capital Mean
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. With that in mind, the ROCE of Nathan's Famous (NASDAQ:NATH) looks attractive right now, so lets see what the trend of returns can tell us.
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 Nathan's Famous is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.30 = US$28m ÷ (US$105m - US$11m) (Based on the trailing twelve months to December 2020).
Therefore, Nathan's Famous has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 4.8%.
View our latest analysis for Nathan's Famous
Historical performance is a great place to start when researching a stock so above you can see the gauge for Nathan's Famous' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Nathan's Famous, check out these free graphs here.
What Does the ROCE Trend For Nathan's Famous Tell Us?
Nathan's Famous deserves to be commended in regards to it's returns. The company has employed 38% more capital in the last five years, and the returns on that capital have remained stable at 30%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Nathan's Famous can keep this up, we'd be very optimistic about its future.
The Bottom Line On Nathan's Famous' ROCE
In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. Therefore it's no surprise that shareholders have earned a respectable 70% return if they held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
Nathan's Famous does have some risks, we noticed 4 warning signs (and 2 which can't be ignored) we think you should know about.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
This article by Simply Wall St is general in nature. 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.
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