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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of Rave Restaurant Group (NASDAQ:RAVE) we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Rave Restaurant Group is:

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

0.20 = US$2.6m ÷ (US$15m - US$1.9m) (Based on the trailing twelve months to March 2024).

So, Rave Restaurant Group has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.

View our latest analysis for Rave Restaurant Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Rave Restaurant Group's ROCE against it's prior returns. If you're interested in investigating Rave Restaurant Group's past further, check out this free graph covering Rave Restaurant Group's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Rave Restaurant Group are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 20%. Basically the business is earning more per dollar of capital invested and in addition to that, 47% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line

To sum it up, Rave Restaurant Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Astute investors may have an opportunity here because the stock has declined 35% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Rave Restaurant Group does have some risks though, and we've spotted 3 warning signs for Rave Restaurant Group that you might be interested in.