Investors searching for multi-bagger stocks tend to hunt for companies with good underlying financial trends.
One of the most important indicators is an increasing return on capital employed (ROCE), along with growth in the firm’s capital base. The combination indicates a business that is plowing back profits at increasing rates of return. Red Robin Gourmet Burgers (NASDAQ:RRGB) is finally beginning to demonstrate encouraging trends along these lines, and it is thus a company that should be further investigated.
ROCE calculates a company’s pre-tax profit from its capital employed. Analysts use the following formula to calculate it:
Return on Capital Employed = EBIT ÷ (Total Assets – Current Liabilities).
For Red Robin Gourmet Burgers, from the trailing twelve months to July 2025, the calculation is:
0.016 = US$6.5m ÷ (US$587m – US$185m).
This equates Red Robin with an ROCE of 1.6%. That’s still lower than the hospitality industry average of 9.6%, but it’s an improvement for the company.
Gazing at trends, Red Robin shifted away from reporting losses five years ago to now reporting positive pre-tax margins. That’s a welcome improvement for shareholders with a long-term perspective. In an interesting development, the company is also employing 51% less capital than it was doing five years ago. On the face of it, this means the business can now generate returns on lower resources, although it could also indicate the sale of assets or cost-cutting.
But the ROCE improvement comes in part from a rise in current liabilities. At present, roughly 32% of Red Robin’s operations are financed by suppliers and short-term lenders. Although this can fuel expansion in the near term, it creates risks if leverage from liabilities increases further.
In general, Red Robin Gourmet Burgers has been demonstrating better capital allocation, returning more on a shrinking capital base. Since its stock price has declined approximately 50% over the past five years, some investors might perceive potential opportunity if these positive financial trends are sustained.
Risks, however, exist. Two warning signs have been highlighted by analysts with Red Robin that investors need to take into consideration as part of their due diligence.
Although Red Robin’s returns are not yet at their peak, its financial trajectory is shifting into a positive direction. For those investors willing to wait a bit longer for higher returns, it also might be worth considering firms already yielding over 25% return on equity.
Red Robin is not yet a breakout tale, but its increasing ROCE trends indicate that it might be worth putting back on the watchlist.
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