If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Texas Roadhouse (NASDAQ:TXRH) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Texas Roadhouse:

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

0.096 = US$167m ÷ (US$2.1b - US$311m) (Based on the trailing twelve months to March 2020).

Therefore, Texas Roadhouse has an ROCE of 9.6%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 6.9%.

See our latest analysis for Texas Roadhouse

In the above chart we have a measured Texas Roadhouse'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 report on analyst forecasts for the company.

The Trend Of ROCE

When we looked at the ROCE trend at Texas Roadhouse, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.6% from 19% five years ago. However it looks like Texas Roadhouse might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

To conclude, we've found that Texas Roadhouse is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 60% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Texas Roadhouse could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Texas Roadhouse isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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