The Returns On Capital At Aristocrat Leisure (ASX:ALL) Don't Inspire Confidence

July 20, 2022
  •  Updated
October 19, 2022
ASX:ALL
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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.

Check out our latest analysis for Aristocrat Leisure

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ASX:ALL Return on Capital Employed July 20th 2022

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.

Valuation is complex, but we're helping make it simple.

Find out whether Aristocrat Leisure is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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