Investors Met With Slowing Returns on Capital At Restaurant Brands International (NYSE:QSR)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after briefly looking over the numbers, we don't think Restaurant Brands International (NYSE:QSR) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Restaurant Brands International, this is the formula:

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

0.075 = US$1.6b ÷ (US$23b - US$1.6b) (Based on the trailing twelve months to December 2020).

Therefore, Restaurant Brands International has an ROCE of 7.5%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 4.9%.

View our latest analysis for Restaurant Brands International

roce

Above you can see how the current ROCE for Restaurant Brands International compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Restaurant Brands International here for free.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Restaurant Brands International in recent years. The company has employed 22% more capital in the last five years, and the returns on that capital have remained stable at 7.5%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

Long story short, while Restaurant Brands International has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 86% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One final note, you should learn about the 3 warning signs we've spotted with Restaurant Brands International (including 1 which is concerning) .

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.

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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