Biglari Holdings (NYSE:BHA) shareholders will want ROCE trajectory to continue

There are a few key trends to look out for if we want to identify the next multi-bagger. Ideally, a business will show two trends; first growth come back on capital employed (ROCE) and on the other hand, growth amount capital employed. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. Speaking of which, we’ve noticed big changes in Biglari Holdings’ (NYSE: BHA) returns on capital, so let’s take a look.

Understanding return on capital employed (ROCE)

For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. The formula for this calculation on Biglari Holdings is:

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

0.056 = $36 million ÷ ($773 million – $138 million) (Based on the last twelve months to June 2022).

Therefore, Biglari Holdings has a ROCE of 5.6%. In absolute terms, this is a weak return and it is also below the hotel industry average of 10%.

Check out our latest analysis for Biglari Holdings

NYSE: BHA Return on Capital Employed August 10, 2022

Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to investigate Biglari Holdings’ past further, check out this free chart of past profits, revenue and cash flow.

What the ROCE trend can tell us

Biglari Holdings did not disappoint when it comes to ROCE growth. Data shows that capital returns have increased by 165% over the past five years. This is not bad, because it indicates that for every dollar invested (capital employed), the company increases the amount earned from that dollar. Speaking of capital employed, the company is actually using 34% less than five years ago, which may be a sign of a company improving efficiency. Biglari Holdings may be selling some assets, so it’s worth checking whether the company has future investment plans to further increase returns.

What we can learn from Biglari Holdings’ ROCE

In a nutshell, we are delighted to see that Biglari Holdings was able to generate higher returns with less capital. And with a respectable 25% attributed to those who held the shares for the past three years, you could say these developments are starting to get the attention they deserve. So given that the stock has proven to have some promising trends, it’s worth researching the company further to see if those trends are likely to persist.

Finally we found 1 warning sign for Biglari Holdings which we think you should be aware of.

For those who like to invest in solid companies, look at this free list of companies with strong balance sheets and high returns on equity.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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