Rave Restaurant Group (NASDAQ:RAVE) Shareholders Will Want The ROCE Trajectory To Continue
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Speaking of which, we noticed some great changes in Rave Restaurant Group's (NASDAQ:RAVE) returns on capital, so let's have a look.
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 Rave Restaurant Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$2.2m ÷ (US$14m - US$2.2m) (Based on the trailing twelve months to June 2023).
Therefore, Rave Restaurant Group has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 9.6% it's much better.
Check out our latest analysis for Rave Restaurant Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Rave Restaurant Group's ROCE against it's prior returns. If you're interested in investigating Rave Restaurant Group's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Rave Restaurant Group's ROCE Trending?
We're delighted to see that Rave Restaurant Group is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 18% on its capital. And unsurprisingly, like most companies trying to break into the black, Rave Restaurant Group is utilizing 34% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
The Key Takeaway
Overall, Rave Restaurant Group gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with a respectable 75% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.
Rave Restaurant Group does have some risks though, and we've spotted 2 warning signs for Rave Restaurant Group that you might be interested in.
While Rave Restaurant Group 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
