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. So on that note, Bowlero (NYSE:BOWL) looks quite promising in regards to its trends of return on capital.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Bowlero, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.056 = US$162m ÷ (US$3.1b - US$192m) (Based on the trailing twelve months to September 2024).
So, Bowlero has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 8.5%.
In the above chart we have measured Bowlero'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 Bowlero for free.
So How Is Bowlero's ROCE Trending?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 5.6%. The amount of capital employed has increased too, by 70%. So we're very much inspired by what we're seeing at Bowlero thanks to its ability to profitably reinvest capital.
In Conclusion...
To sum it up, Bowlero has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 27% awarded to those who held the stock over the last three years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Bowlero can keep these trends up, it could have a bright future ahead.
One more thing: We've identified 2 warning signs with Bowlero (at least 1 which can't be ignored) , and understanding them would certainly be useful.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
