There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Aristocrat Leisure (ASX:ALL), it didn't seem to tick all of these boxes.
What is 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. To calculate this metric for Aristocrat Leisure, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = AU$1.3b ÷ (AU$9.2b - AU$1.1b) (Based on the trailing twelve months to March 2022).
So, Aristocrat Leisure has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 8.4% generated by the Hospitality industry.
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 to see what analysts are forecasting going forward, you should check out our free report for Aristocrat Leisure.
What Can We Tell From Aristocrat Leisure's ROCE Trend?
In terms of Aristocrat Leisure's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 28%, but since then they've fallen to 16%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line On Aristocrat Leisure's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Aristocrat Leisure. Furthermore the stock has climbed 90% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
Aristocrat Leisure does have some risks though, and we've spotted 1 warning sign for Aristocrat Leisure that you might be interested in.
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.