Investors Met With Slowing Returns on Capital At Aristocrat Leisure (ASX:ALL)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at Aristocrat Leisure's (ASX:ALL) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Aristocrat Leisure is:

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

0.17 = AU$1.5b ÷ (AU$10b - AU$1.3b) (Based on the trailing twelve months to March 2023).

Therefore, Aristocrat Leisure has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 6.2% it's much better.

Check out our latest analysis for Aristocrat Leisure

Above you can see how the current ROCE for Aristocrat Leisure compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Aristocrat Leisure here for free.

What Does the ROCE Trend For Aristocrat Leisure Tell Us?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 17% and the business has deployed 88% more capital into its operations. Since 17% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Our Take On Aristocrat Leisure's ROCE

To sum it up, Aristocrat Leisure has simply been reinvesting capital steadily, at those decent rates of return. And the stock has followed suit returning a meaningful 56% to shareholders over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you're still interested in Aristocrat Leisure it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Aristocrat Leisure 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.