CAVA Group (NYSE:CAVA) shareholders want to see ROCE development continue

What trends should we look for to identify stocks that can multiply in value over the long term? Ideally, a company exhibits two trends; firstly, a growing one return on capital employed (ROCE) and secondly an increase Crowd of the capital employed. Ultimately, this shows that this is a company that reinvests profits at increasing returns. So when we looked at that CAVA group (NYSE:CAVA) and its ROCE trend, we really liked what we saw.

Return on Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's annual pre-tax profit (its return) in relation to the capital employed in the company. The formula for this calculation by CAVA Group is:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)

0.036 = $33 million ÷ ($1.0 billion – $124 million) (Based on the last twelve months ending July 2024).

Therefore, CAVA Group has a ROCE of 3.6%. Ultimately, this is a low return and it is below the hotel industry average of 10%.

Check out our latest analysis for CAVA Group

In the chart above, we measured CAVA Group's past ROCE compared to its past performance, but the future is arguably more important. If you are interested, you can see the analyst forecasts in our free Analyst report for CAVA Group.

What does the ROCE trend tell us for CAVA Group?

The fact that CAVA Group is now generating some pre-tax profits from its previous investments is very encouraging. About two years ago the company was making a loss, but things have turned around as it now earns 3.6% of its capital. Additionally, the company is using 100% more capital than before, which is to be expected from a company trying to break even. This may indicate that there are numerous opportunities to invest capital internally and at increasingly higher interest rates, both common characteristics of a multi-bagger.

Our opinion on CAVA Group's ROCE

Overall, CAVA Group receives great support from us, especially thanks to the fact that it is now profitable and is reinvesting in its business. And since the stock has performed exceptionally well over the last year, these patterns are being taken into account by investors. However, we still believe that the company requires further due diligence given its promising fundamentals.

In a separate note we noted 1 warning sign for CAVA Group You will probably want to know something about it.

If you want to look for solid companies with great earnings, check this out free List of companies with good balance sheets and impressive returns on equity.

Do you have feedback on this article? Worried about the content? Get in touch directly with us. Alternatively, you can also send an email to editor-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 does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any stocks mentioned.