Lordos Hotels (Holdings) (CSE:LHH) Could Be Struggling To Allocate Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Lordos Hotels (Holdings) (CSE:LHH) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Lordos Hotels (Holdings):

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

0.025 = €2.9m ÷ (€116m - €3.6m) (Based on the trailing twelve months to December 2022).

So, Lordos Hotels (Holdings) has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 6.9%.

See our latest analysis for Lordos Hotels (Holdings)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lordos Hotels (Holdings)'s ROCE against it's prior returns. If you're interested in investigating Lordos Hotels (Holdings)'s past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Lordos Hotels (Holdings), we didn't gain much confidence. To be more specific, ROCE has fallen from 3.5% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Lordos Hotels (Holdings) is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 79% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Lordos Hotels (Holdings) (of which 2 are significant!) that you should know about.

While Lordos Hotels (Holdings) 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. 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.