What early trends should we look at to identify a stock that could increase in value over the long term? First, we want to identify the growing Return Over and above the Return on Capital Employed (ROCE), steadily increasing Base of capital employed. This basically means that a company has profitable initiatives in which it can continue to reinvest, which is characteristic of a compounding machine. so while wingstop (NASDAQ:WING) has a high ROCE right now, let’s see what we can learn from how returns are changing.
Return on Capital Employed (ROCE): What is it?
In case you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) that a company generates from capital employed in its business. To calculate this metric for Wingstop, the formula is:
Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.22 = US$78m ÷ (US$411m – US$61m) (Based on last twelve months to September 2022),
thus, Wingstop’s ROCE is 22%. This is a great return and not only that, it is also higher than the average of 11% earned by companies in a similar industry.
View our latest analysis for Wingstop
In the chart above, we’ve measured Wingstop’s past ROCE against its past performance, but the future is arguably more important. If you want to see what the analysts are predicting next, you should check out our free Wingstop reports.
What do the ROCE trends tell us for Wingstop?
On the surface, the ROCE trend at Wingstop doesn’t inspire confidence. Although it is a matter of relief that the ROCE is high, five years back it was 31%. While both capital employed and revenue have increased, it appears that the business is currently developing as a result of short term returns. And if the increased capital generates additional returns, the business and thus the shareholders will benefit in the long run.
In short, despite diminishing returns in the short term, we’re encouraged to see that Wingstop is reinvesting for growth and resulting in higher sales. And long-term investors should be optimistic because the stock has delivered a whopping 403% return to shareholders over the past five years. So while investors seem to be recognizing these promising trends, we’ll be taking a closer look at this stock to make sure other metrics justify the positive outlook.
Since almost every company faces some risks, it’s worth knowing what they are, and we’ve looked at 4 Warning Signs for Wingstop (3 of which make us uncomfortable!) Which you should know about.
If you want to discover more stocks that are generating high returns, check this out free List of stocks with solid balance sheets which are also earning high return on equity.
what are the risks and opportunities wingstop,
Wingstop Inc., together with its subsidiaries, operates franchises and restaurants under the Wingstop brand name.
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Earnings projected to grow 18.2% per annum
44% increase in income compared to last year
Debt is not well covered by operating cash flow
high level of non-cash earnings
negative shareholder equity
Significant insider sales in the last 3 months
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This Simply Wall St article is general in nature. We only provide commentary based on historical data and analyst forecasts using an unbiased methodology and our articles are not intended to provide financial advice. It is not a recommendation to buy or sell any stock, and does not take into account 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 Street has no position in any of the stocks mentioned.