What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating Kura Sushi USA (NASDAQ:KRUS), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Kura Sushi USA, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.000069 = US$18k ÷ (US$286m - US$25m) (Based on the trailing twelve months to May 2023).
So, Kura Sushi USA has an ROCE of 0.007%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 9.6%.
View our latest analysis for Kura Sushi USA
Above you can see how the current ROCE for Kura Sushi USA 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 Kura Sushi USA here for free.
What Can We Tell From Kura Sushi USA's ROCE Trend?
On the surface, the trend of ROCE at Kura Sushi USA doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.007% from 7.2% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From Kura Sushi USA's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Kura Sushi USA. And the stock has done incredibly well with a 395% return over the last three years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
On a final note, we found 2 warning signs for Kura Sushi USA (1 is a bit concerning) you should be aware of.
While Kura Sushi USA 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.
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.
