What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 First Watch Restaurant Group (NASDAQ:FWRG) so let’s look a bit deeper.
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on First Watch Restaurant Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.032 = US$44m ÷ (US$1.5b – US$138m) (Based on the trailing twelve months to December 2024).
Therefore, First Watch Restaurant Group has an ROCE of 3.2%. In absolute terms, that’s a low return and it also under-performs the Hospitality industry average of 9.8%.
Check out our latest analysis for First Watch Restaurant Group
Above you can see how the current ROCE for First Watch Restaurant Group compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering First Watch Restaurant Group for free.
The fact that First Watch Restaurant Group 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 3.2% on its capital. Not only that, but the company is utilizing 51% more capital than before, but that’s to be expected from a company trying to break into profitability. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
Overall, First Watch Restaurant Group gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a solid 24% to shareholders over the last three years, it’s fair to say investors are beginning to recognize these changes. In light of that, we think it’s worth looking further into this stock because if First Watch Restaurant Group can keep these trends up, it could have a bright future ahead.
