To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So on that note, Biglari Holdings (NYSE:BH.A) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
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 Biglari Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.045 = US$35m ÷ (US$885m - US$118m) (Based on the trailing twelve months to March 2024).
Thus, Biglari Holdings has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 10%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Biglari Holdings' ROCE against it's prior returns. If you'd like to look at how Biglari Holdings has performed in the past in other metrics, you can view this free graph of Biglari Holdings' past earnings, revenue and cash flow.
So How Is Biglari Holdings' ROCE Trending?
It's great to see that Biglari Holdings has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 4.5% on their capital employed. In regards to capital employed, Biglari Holdings is using 22% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Biglari Holdings could be selling under-performing assets since the ROCE is improving.
The Key Takeaway
In the end, Biglari Holdings has proven it's capital allocation skills are good with those higher returns from less amount of capital. And with a respectable 86% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On a final note, we've found 2 warning signs for Biglari Holdings that we think you should be aware of.
While Biglari Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.