In This Article:
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at J D Wetherspoon (LON:JDW) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is 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. To calculate this metric for J D Wetherspoon, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.084 = UK£134m ÷ (UK£1.9b - UK£349m) (Based on the trailing twelve months to January 2025).
So, J D Wetherspoon has an ROCE of 8.4%. Even though it's in line with the industry average of 8.1%, it's still a low return by itself.
Check out our latest analysis for J D Wetherspoon
Above you can see how the current ROCE for J D Wetherspoon 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 analyst report for J D Wetherspoon .
What The Trend Of ROCE Can Tell Us
Things have been pretty stable at J D Wetherspoon, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at J D Wetherspoon in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
The Bottom Line On J D Wetherspoon's ROCE
In summary, J D Wetherspoon isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 26% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.