If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Dine Brands Global's (NYSE:DIN) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
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. To calculate this metric for Dine Brands Global, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$181m ÷ (US$1.7b - US$410m) (Based on the trailing twelve months to March 2024).
Thus, Dine Brands Global has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 11% it's much better.
In the above chart we have measured Dine Brands Global's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Dine Brands Global .
The Trend Of ROCE
Dine Brands Global has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 29%. The company is now earning US$0.1 per dollar of capital employed. In regards to capital employed, Dine Brands Global appears to been achieving more with less, since the business is using 28% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
What We Can Learn From Dine Brands Global's ROCE
In summary, it's great to see that Dine Brands Global has been able to turn things around and earn higher returns on lower amounts of capital. Astute investors may have an opportunity here because the stock has declined 52% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.
One final note, you should learn about the 3 warning signs we've spotted with Dine Brands Global (including 2 which don't sit too well with us) .
While Dine Brands Global 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com