Capital Allocation Trends At Fiesta Restaurant Group (NASDAQ:FRGI) Aren't Ideal

Simply Wall St
·2 min read

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Fiesta Restaurant Group (NASDAQ:FRGI), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. The formula for this calculation on Fiesta Restaurant Group is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.01 = US$5.2m ÷ (US$561m - US$62m) (Based on the trailing twelve months to April 2021).

So, Fiesta Restaurant Group has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 4.8%.

View our latest analysis for Fiesta Restaurant Group

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Above you can see how the current ROCE for Fiesta Restaurant Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Fiesta Restaurant Group Tell Us?

On the surface, the trend of ROCE at Fiesta Restaurant Group doesn't inspire confidence. To be more specific, ROCE has fallen from 17% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From Fiesta Restaurant Group's ROCE

We're a bit apprehensive about Fiesta Restaurant Group because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 44% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to continue researching Fiesta Restaurant Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Fiesta Restaurant Group 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.

This article by Simply Wall St is general in nature. 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.

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