Here's What's Concerning About BJ's Restaurants' (NASDAQ:BJRI) Returns On Capital
If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at BJ's Restaurants (NASDAQ:BJRI) 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?
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 BJ's Restaurants, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.025 = US$21m ÷ (US$1.0b - US$183m) (Based on the trailing twelve months to October 2023).
So, BJ's Restaurants has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 9.3%.
View our latest analysis for BJ's Restaurants
In the above chart we have measured BJ's Restaurants' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering BJ's Restaurants here for free.
What Can We Tell From BJ's Restaurants' ROCE Trend?
On the surface, the trend of ROCE at BJ's Restaurants doesn't inspire confidence. To be more specific, ROCE has fallen from 11% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On BJ's Restaurants' ROCE
Bringing it all together, while we're somewhat encouraged by BJ's Restaurants' reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 49% so the market doesn't look too hopeful on these trends strengthening any time soon. 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 want to continue researching BJ's Restaurants, you might be interested to know about the 1 warning sign that our analysis has discovered.
While BJ's Restaurants may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
