To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think ONE Group Hospitality (NASDAQ:STKS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

We've discovered 2 warning signs about ONE Group Hospitality. View them for free.

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. To calculate this metric for ONE Group Hospitality, this is the formula:

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

0.042 = US$35m ÷ (US$959m - US$131m) (Based on the trailing twelve months to December 2024).

Therefore, ONE Group Hospitality has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 10.0%.

Check out our latest analysis for ONE Group Hospitality

In the above chart we have measured ONE Group Hospitality's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for ONE Group Hospitality .

What Does the ROCE Trend For ONE Group Hospitality Tell Us?

There are better returns on capital out there than what we're seeing at ONE Group Hospitality. The company has consistently earned 4.2% for the last five years, and the capital employed within the business has risen 364% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On ONE Group Hospitality's ROCE

In conclusion, ONE Group Hospitality has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 99% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One final note, you should learn about the 2 warning signs we've spotted with ONE Group Hospitality (including 1 which makes us a bit uncomfortable) .

While ONE Group Hospitality 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.

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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.