Leptos Calypso Hotels (CSE:LCH) Could Be At Risk Of Shrinking As A Company

When researching a stock for investment, what can tell us that the company is in decline? 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. On that note, looking into Leptos Calypso Hotels (CSE:LCH), we weren't too upbeat about how things were going.

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 Leptos Calypso Hotels:

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

0.011 = €1.5m ÷ (€155m - €17m) (Based on the trailing twelve months to June 2022).

So, Leptos Calypso Hotels has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 5.4%.

See our latest analysis for Leptos Calypso Hotels

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Leptos Calypso Hotels' past further, check out this free graph of past earnings, revenue and cash flow.

SWOT Analysis for Leptos Calypso Hotels

What Does the ROCE Trend For Leptos Calypso Hotels Tell Us?

In terms of Leptos Calypso Hotels' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 1.7% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Leptos Calypso Hotels becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Leptos Calypso Hotels is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Leptos Calypso Hotels does have some risks, we noticed 5 warning signs (and 4 which make us uncomfortable) we think you should know about.

While Leptos Calypso Hotels isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.