There Are Reasons To Feel Uneasy About Domino's Pizza Group's (LON:DOM) Returns On Capital
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So while Domino's Pizza Group (LON:DOM) has a high ROCE right now, lets see what we can decipher from how returns are changing.
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 Domino's Pizza Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.25 = UK£101m ÷ (UK£512m - UK£112m) (Based on the trailing twelve months to June 2022).
Thus, Domino's Pizza Group has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 6.5% earned by companies in a similar industry.
View our latest analysis for Domino's Pizza Group
Above you can see how the current ROCE for Domino's Pizza 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.
So How Is Domino's Pizza Group's ROCE Trending?
On the surface, the trend of ROCE at Domino's Pizza Group doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 34%. However it looks like Domino's Pizza Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From Domino's Pizza Group's ROCE
In summary, Domino's Pizza Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 0.9% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
If you'd like to know more about Domino's Pizza Group, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.
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