Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Flanigan's Enterprises (NYSEMKT:BDL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Flanigan's Enterprises:

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

0.042 = US$3.8m ÷ (US$112m - US$21m) (Based on the trailing twelve months to June 2020).

Thus, Flanigan's Enterprises has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 5.4%.

Check out our latest analysis for Flanigan's Enterprises

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Flanigan's Enterprises' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Flanigan's Enterprises' ROCE Trend?

On the surface, the trend of ROCE at Flanigan's Enterprises doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.2% from 16% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Flanigan's Enterprises' ROCE

Bringing it all together, while we're somewhat encouraged by Flanigan's Enterprises' reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 33% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Flanigan's Enterprises (including 1 which is is a bit unpleasant) .

While Flanigan's Enterprises may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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