If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with Returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Driven Brands Holdings (NASDAQ: DRVN) and its ROCE trend, we weren’t exactly thrilled.
Return On Capital Employed (ROCE): What is it?
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 Driven Brands Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.049 = US $ 269m ÷ (US $ 5.9b – US $ 424m) (Based on the trailing twelve months to March 2022).
Therefore, Driven Brands Holdings has an ROCE of 4.9%. In absolute terms, that’s a low return and it also under-performs the Commercial Services industry average of 8.5%.
Check out our latest analysis for Driven Brands Holdings
Above you can see how the current ROCE for Driven Brands Holdings Compares to its prior Returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Driven Brands Holdings.
How Are Returns Trending?
There are better returns to capital out there than what we’re seeing at Driven Brands Holdings. The company has consistently earned 4.9% for the last three years, and the capital employed within the business has risen 308% in that time. This poor ROCE doesn’t inspire confidence right now, and with the increase in capital employed, it’s evident that the business isn’t deploying the funds into high return investments.
The Bottom Line On Driven Brands Holdings’ ROCE
Long story short, while Driven Brands Holdings has been reinvesting its capital, the Returns that it’s generating haven’t increased. Additionally, the stock’s total return to shareholders over the last year has been flat, which isn’t too surprising. In any case, the stock doesn’t have these traits of a multi-bagger discussed above, so if that’s what you’re looking for, we think you’d have more luck elsewhere.
Driven Brands Holdings does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn’t sit too well with us …
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.