Be Wary Of Leptos Calypso Hotels (CSE:LCH) And Its Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Leptos Calypso Hotels (CSE:LCH) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Leptos Calypso Hotels:

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

0.017 = €2.5m ÷ (€161m - €17m) (Based on the trailing twelve months to December 2022).

Thus, Leptos Calypso Hotels has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 4.7%.

See our latest analysis for Leptos Calypso Hotels

Historical performance is a great place to start when researching a stock so above you can see the gauge for Leptos Calypso Hotels' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Leptos Calypso Hotels, check out these free graphs here.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Leptos Calypso Hotels. To be more specific, the ROCE was 2.4% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Leptos Calypso Hotels to turn into a multi-bagger.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Leptos Calypso Hotels (of which 3 make us uncomfortable!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.