What are the early Trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Chipotle Mexican Grill’s (NYSE: CMG) Returns are capital, so let’s have a look.
What is Return On Capital Employed (ROCE)?
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Chipotle Mexican Grill, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.15 = US $ 831m (US $ 6.5b – US $ 834m) (Based on the trailing twelve months to March 2022).
Therefore, Chipotle Mexican Grill has an ROCE of 15%. In Absolute terms, that’s a satisfactory return, but compared to the Hospitality industry average of 9.5% it’s much better.
View our latest analysis for Chipotle Mexican Grill
In the above chart we have measured Chipotle Mexican Grill’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free report on Analyst forecasts for the company.
So How Is Chipotle Mexican Grill’s ROCE Trending?
The Trends we’ve noticed at Chipotle Mexican Grill are quite reassuring. Over the last five years, Returns on capital employed have risen substantially to 15%. The amount of capital employed has increased too, by 221%. So we’re very much inspired by what we’re seeing at Chipotle Mexican Grill thanks to its ability to profitably reinvest capital.
The Key Takeaway
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that’s what Chipotle Mexican Grill has. And a remarkable 206% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these Trends are going to continue.
One more thing to note, we’ve identified 1 warning sign with Chipotle Mexican Grill and understanding it should be part of your investment process.
While Chipotle Mexican Grill 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.