What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings back into the business at ever-higher rates of return. With that in mind, we’ve noticed some promising trends at Les Hôtels de Paris (EPA:HDP) so let’s look a bit deeper.
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. Analysts use this formula to calculate it for Les Hôtels de Paris:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.0044 = €574k ÷ (€173m – €43m) (Based on the trailing twelve months to December 2019).
Therefore, Les Hôtels de Paris has an ROCE of 0.4%. Ultimately, that’s a low return and it under-performs the Hospitality industry average of 5.3%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Les Hôtels de Paris’ ROCE against it’s prior returns. If you want to delve into the historical earnings, revenue and cash flow of Les Hôtels de Paris, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
Les Hôtels de Paris has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it’s earning 0.4% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Les Hôtels de Paris is utilizing 42% more capital than it was five years ago. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
What We Can Learn From Les Hôtels de Paris’ ROCE
To the delight of most shareholders, Les Hôtels de Paris has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 12% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.
Since virtually every company faces some risks, it’s worth knowing what they are, and we’ve spotted 3 warning signs for Les Hôtels de Paris (of which 2 are a bit unpleasant!) that you should know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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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