What early trends should we look for to identify a stock that could multiply in value over the long term? First, we want to identify a growth yield on the invested capital (ROCE) and also an ever-increasing value base of the invested capital. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. That said, from a first look at Dutch Brothers (NYSE:BROS) we’re not too keen on the trend in returns, but let’s take a deeper look.

Understanding return on capital employed (ROCE)

If you’re new to ROCE, it measures the ‘return’ (pre-tax profit) that a company generates from the capital invested in its operations. The formula for this calculation on Dutch Bros is:

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

0.047 = $106 million ÷ ($2.4 billion – $180 million) (Based on the last twelve months to September 2024).

So, Dutch Bros has a ROCE of 4.7%. In absolute terms, this is a low return and it also performs below the catering average of 9.1%.

Check out our latest analysis for Dutch Bros

Above you can see how the current ROCE for Dutch Bros compares to its previous return on capital, but there’s only so much you can tell from the past. If you want to see what analysts are predicting for the future, check out our free analyst report for Dutch Bros.

What can we deduce from Dutch Bros’ ROCE trend?

The ROCE trend doesn’t look great as it is down from 8.6% four years ago, while the company’s invested capital is up 1,126%. That said, Dutch Bros raised some capital before their latest results were announced, so that could partly explain the increase in capital invested. It is unlikely that all of the money raised has already been deployed, so as a result, Dutch Bros may not have received the full period of revenue contribution.

In connection with this, Dutch Bros has reduced its current liabilities to 7.4% of total assets. So we can link some of this to the decline in ROCE. In effect, this means that their suppliers or short-term creditors finance less of the business, reducing some elements of risk. Since the company is actually financing more of its operations with its own money, you could argue that this has made the company less efficient at generating ROCE.

The most important takeaway

In summary, despite lower short-term returns, we are encouraged to see Dutch Bros reinvesting in growth and therefore achieving higher revenue. However, these growth trends have not led to growth returns, as the stock is down 24% over the past three years. So we think it’s worth investigating this stock further as the trends look encouraging.

Like most companies, Dutch Bros comes with some risks, and we discovered that 1 warning sign that you should be aware of.

Although Dutch Bros doesn’t have the highest returns, look at this free list of companies that achieve high returns on equity with solid balance sheets.

Do you have feedback on this article? Worried about the content? Please contact us directly from us. You can also email the editorial team (at) Simplywallst.com.

This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.