Cheesecake Factory’s (NASDAQ:CAKE) capital returns don’t reflect the business well


If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should watch out for. Typically, we will want to notice a growth trend come back on capital employed (ROCE) and at the same time, a base capital employed. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. That said, at a first glance at cheesecake factory (NASDAQ:CAKE) we’re not jumping off our chairs on the yield trend, but taking a closer look.

Understanding return on capital employed (ROCE)

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for Cheesecake Factory, here is the formula:

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

0.056 = $121 million ÷ ($2.8 billion – $624 million) (Based on the last twelve months to June 2022).

So, Cheesecake Factory posted a ROCE of 5.6%. Ultimately, it’s a poor performer and it underperforms the hotel industry average by 9.6%.

Our analysis indicates that CAKE is potentially overrated!

NasdaqGS:CAKE Return on Capital Employed October 16, 2022

In the chart above, we measured Cheesecake Factory’s past ROCE against its past performance, but the future is arguably more important. If you want, you can check out analyst forecasts covering Cheesecake Factory here for free.

What can we say about the Cheesecake Factory ROCE trend?

On the surface, the ROCE trend at Cheesecake Factory does not inspire confidence. To be more specific, ROCE has fallen by 20% over the past five years. However, given that capital employed and revenue have both increased, it appears that the company is currently continuing to grow, following short-term returns. If these investments prove successful, it can bode very well for long-term stock performance.

Cheesecake Factory ROCE Basics

In summary, despite lower returns in the short term, we are encouraged to see that Cheesecake Factory is reinvesting for growth and has thus increased sales. These growth trends have not led to returns to growth, however, as the stock has fallen 20% over the past five years. Therefore, we recommend that you research this stock further to find out what other company fundamentals can show us.

One more thing to note, we have identified 3 warning signs with Cheesecake Factory and understanding them should be part of your investment process.

Although Cheesecake Factory isn’t currently generating the highest returns, we’ve compiled a list of companies that are currently generating over 25% return on equity. look at this free list here.

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.

Valuation is complex, but we help make it simple.

Find out if cheesecake factory is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

See the free analysis


Comments are closed.