If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at European Wax Center (NASDAQ:EWCZ) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on European Wax Center is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.061 = US$44m ÷ (US$754m - US$29m) (Based on the trailing twelve months to September 2023).
So, European Wax Center has an ROCE of 6.1%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 7.6%.
See our latest analysis for European Wax Center
In the above chart we have measured European Wax Center's 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 European Wax Center here for free.
How Are Returns Trending?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last three years, returns on capital employed have risen substantially to 6.1%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 25%. So we're very much inspired by what we're seeing at European Wax Center thanks to its ability to profitably reinvest capital.
Our Take On European Wax Center's ROCE
To sum it up, European Wax Center has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Investors may not be impressed by the favorable underlying trends yet because over the last year the stock has only returned 4.5% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
If you want to continue researching European Wax Center, you might be interested to know about the 1 warning sign that our analysis has discovered.
While European Wax Center 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.
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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.
