Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Krispy Kreme (NASDAQ:DNUT) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Krispy Kreme is:

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

0.0037 = US$9.6m ÷ (US$3.1b - US$475m) (Based on the trailing twelve months to September 2024).

Thus, Krispy Kreme has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 8.5%.

Check out our latest analysis for Krispy Kreme

In the above chart we have measured Krispy Kreme's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Krispy Kreme .

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Krispy Kreme. To be more specific, the ROCE was 1.6% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Krispy Kreme becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Krispy Kreme is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last three years have experienced a 31% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Krispy Kreme does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are significant...

While Krispy Kreme 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.