The Return Trends At Noodles (NASDAQ:NDLS) Look Promising
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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, we've noticed some promising trends at Noodles (NASDAQ:NDLS) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Noodles:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0036 = US$996k ÷ (US$343m - US$66m) (Based on the trailing twelve months to September 2022).
Thus, Noodles has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 11%.
See our latest analysis for Noodles
In the above chart we have measured Noodles' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Noodles.
So How Is Noodles' ROCE Trending?
The fact that Noodles is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 0.4% on its capital. In addition to that, Noodles is employing 86% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
Our Take On Noodles' ROCE
In summary, it's great to see that Noodles has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 20% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.
Noodles does have some risks though, and we've spotted 1 warning sign for Noodles that you might be interested in.
While Noodles isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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