Noodles & Company (NASDAQ:NDLS) shares are up more than 26.83% this year and recently increased 1.96% or $0.1 to settle at $5.20. RCI Hospitality Holdings, Inc. (NASDAQ:RICK), on the other hand, is up 91.17% year to date as of 11/21/2017. It currently trades at $32.69 and has returned 11.11% during the past week.

Noodles & Company (NASDAQ:NDLS) and RCI Hospitality Holdings, Inc. (NASDAQ:RICK) are the two most active stocks in the Restaurants industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

**Growth**

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect NDLS to grow earnings at a 15.60% annual rate over the next 5 years. Comparatively, RICK is expected to grow at a 40.00% annual rate. All else equal, RICK’s higher growth rate would imply a greater potential for capital appreciation.

**Profitability and Returns**

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. EBITDA margin of 21.76% for RCI Hospitality Holdings, Inc. (RICK). NDLS’s ROI is -62.20% while RICK has a ROI of 7.80%. The interpretation is that RICK’s business generates a higher return on investment than NDLS’s.

**Cash Flow **

Earnings don’t always accurately reflect the amount of cash that a company brings in. NDLS’s free cash flow (“FCF”) per share for the trailing twelve months was -0.10. Comparatively, RICK’s free cash flow per share was +0.33. On a percent-of-sales basis, NDLS’s free cash flow was -0% while RICK converted 0% of its revenues into cash flow. This means that, for a given level of sales, NDLS is able to generate more free cash flow for investors.

**Liquidity and Financial Risk**

Liquidity and leverage ratios are important because they reveal the financial health of a company. NDLS has a current ratio of 0.60 compared to 1.00 for RICK. This means that RICK can more easily cover its most immediate liabilities over the next twelve months. NDLS’s debt-to-equity ratio is 1.78 versus a D/E of 0.92 for RICK. NDLS is therefore the more solvent of the two companies, and has lower financial risk.

**Valuation**

NDLS trades at a forward P/E of 126.83, a P/B of 5.98, and a P/S of 0.45, compared to a forward P/E of 17.14, a P/B of 2.33, and a P/S of 2.27 for RICK. NDLS is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

**Analyst Price Targets and Opinions**

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. NDLS is currently priced at a 14.04% to its one-year price target of 4.56. Comparatively, RICK is 0.58% relative to its price target of 32.50. This suggests that RICK is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 3.00 for NDLS and 2.00 for RICK, which implies that analysts are more bullish on the outlook for NDLS.

**Risk and Volatility**

No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. NDLS has a beta of -0.51 and RICK’s beta is 0.24. NDLS’s shares are therefore the less volatile of the two stocks.

**Insider Activity and Investor Sentiment**

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. NDLS has a short ratio of 23.56 compared to a short interest of 4.06 for RICK. This implies that the market is currently less bearish on the outlook for RICK.

**Summary**

RCI Hospitality Holdings, Inc. (NASDAQ:RICK) beats Noodles & Company (NASDAQ:NDLS) on a total of 11 of the 14 factors compared between the two stocks. RICK , is more profitable, generates a higher return on investment, has higher cash flow per share, higher liquidity and has lower financial risk. In terms of valuation, RICK is the cheaper of the two stocks on an earnings and book value, RICK is more undervalued relative to its price target. Finally, RICK has better sentiment signals based on short interest.