There are a few key trends to look for if we want to identify the next 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Driven Brands Holdings (NASDAQ:DRVN) so let's look a bit deeper.

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 Driven Brands Holdings, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.059 = US$317m ÷ (US$5.9b - US$475m) (Based on the trailing twelve months to September 2023).

Therefore, Driven Brands Holdings has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 9.5%.

See our latest analysis for Driven Brands Holdings

In the above chart we have measured Driven Brands Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Driven Brands Holdings here for free.

What Can We Tell From Driven Brands Holdings' ROCE Trend?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 5.9%. Basically the business is earning more per dollar of capital invested and in addition to that, 239% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From Driven Brands Holdings' ROCE

All in all, it's terrific to see that Driven Brands Holdings is reaping the rewards from prior investments and is growing its capital base. Given the stock has declined 48% in the last year, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

While Driven Brands Holdings looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether DRVN is currently trading for a fair price.

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.