Investors Will Want First Watch Restaurant Group's (NASDAQ:FWRG) Growth In ROCE To Persist
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, First Watch Restaurant Group (NASDAQ:FWRG) looks quite promising in regards to its trends of return on capital.
Understanding 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. The formula for this calculation on First Watch Restaurant Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.036 = US$40m ÷ (US$1.2b - US$110m) (Based on the trailing twelve months to September 2023).
Therefore, First Watch Restaurant Group has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.1%.
View our latest analysis for First Watch Restaurant Group
Above you can see how the current ROCE for First Watch Restaurant Group 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 First Watch Restaurant Group's ROCE Trend?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last four years, returns on capital employed have risen substantially to 3.6%. The amount of capital employed has increased too, by 31%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Key Takeaway
All in all, it's terrific to see that First Watch Restaurant Group is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 25% return over the last year. In light of that, we think it's worth looking further into this stock because if First Watch Restaurant Group can keep these trends up, it could have a bright future ahead.
On a final note, we've found 1 warning sign for First Watch Restaurant Group that we think you should be aware of.
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.
