Returns On Capital At Leptos Calypso Hotels (CSE:LCH) Paint An Interesting Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Leptos Calypso Hotels (CSE:LCH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. 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)

0.002 = €281k ÷ (€153m - €10m) (Based on the trailing twelve months to June 2020).

Thus, Leptos Calypso Hotels has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 1.5%.

View 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.

So How Is Leptos Calypso Hotels' ROCE Trending?

In terms of Leptos Calypso Hotels' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 1.7% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Leptos Calypso Hotels has done well to pay down its current liabilities to 6.8% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Leptos Calypso Hotels' ROCE

We're a bit apprehensive about Leptos Calypso Hotels because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 35% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a separate note, we've found 3 warning signs for Leptos Calypso Hotels you'll probably want to know about.

While Leptos Calypso Hotels 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. 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.
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