Here's What Chipotle Mexican Grill's (NYSE:CMG) Strong Returns On Capital Mean
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. That's why when we briefly looked at Chipotle Mexican Grill's (NYSE:CMG) ROCE trend, we were very happy with what we saw.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Chipotle Mexican Grill, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = US$1.5b ÷ (US$7.6b - US$982m) (Based on the trailing twelve months to June 2023).
Therefore, Chipotle Mexican Grill has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 9.6%.
View our latest analysis for Chipotle Mexican Grill
In the above chart we have measured Chipotle Mexican Grill'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 Chipotle Mexican Grill here for free.
The Trend Of ROCE
In terms of Chipotle Mexican Grill's history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 22% and the business has deployed 270% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.
The Bottom Line
In summary, we're delighted to see that Chipotle Mexican Grill has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And long term investors would be thrilled with the 313% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
While Chipotle Mexican Grill looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether CMG is currently trading for a fair price.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.
