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? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at Leptos Calypso Hotels (CSE:LCH), so let's see why.

Return On Capital Employed (ROCE): What Is It?

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

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

0.022 = €3.2m ÷ (€163m - €18m) (Based on the trailing twelve months to December 2023).

Therefore, Leptos Calypso Hotels has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 8.1%.

View 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're interested in investigating Leptos Calypso Hotels' past further, check out this free graph covering Leptos Calypso Hotels' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Leptos Calypso Hotels, given the returns are trending downwards. About five years ago, returns on capital were 3.2%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. 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.

What We Can Learn From Leptos Calypso Hotels' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 25% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we've found 3 warning signs for Leptos Calypso Hotels that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.