If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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.
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. To calculate this metric for Lordos Hotels (Holdings), this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0054 = €637k ÷ (€121m - €3.8m) (Based on the trailing twelve months to June 2020).
Thus, Lordos Hotels (Holdings) has an ROCE of 0.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 1.1%.
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 want to delve into the historical earnings, revenue and cash flow of Lordos Hotels (Holdings), check out these free graphs here.
So How Is Lordos Hotels (Holdings)'s ROCE Trending?
When we looked at the ROCE trend at Lordos Hotels (Holdings), we didn't gain much confidence. Around five years ago the returns on capital were 0.8%, but since then they've fallen to 0.5%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
What We Can Learn From Lordos Hotels (Holdings)'s ROCE
We're a bit apprehensive about Lordos Hotels (Holdings) because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these poor fundamentals, the stock has gained a huge 270% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
One final note, you should learn about the 5 warning signs we've spotted with Lordos Hotels (Holdings) (including 1 which is a bit concerning) .
While Lordos Hotels (Holdings) 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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