Investors Met With Slowing Returns on Capital At Louis (CSE:LUI)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Louis (CSE:LUI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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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 Louis, this is the formula:

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

0.058 = €18m ÷ (€368m - €56m) (Based on the trailing twelve months to June 2024).

So, Louis has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 8.0%.

See our latest analysis for Louis

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 Louis' past further, check out this free graph covering Louis' past earnings, revenue and cash flow.

What Does the ROCE Trend For Louis Tell Us?

Over the past five years, Louis' ROCE has remained relatively flat while the business is using 43% less capital than before. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. In addition to that, since the ROCE doesn't scream "quality" at 5.8%, it's hard to get excited about these developments.

The Bottom Line On Louis' ROCE

Overall, we're not ecstatic to see Louis reducing the amount of capital it employs in the business. Unsurprisingly, the stock has only gained 23% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing: We've identified 4 warning signs with Louis (at least 2 which are significant) , and understanding these would certainly be useful.

While Louis 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.