If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating A. Tsokkos Hotels (CSE:TSH), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on A. Tsokkos Hotels is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.017 = €7.9m ÷ (€535m - €58m) (Based on the trailing twelve months to June 2020).
Therefore, A. Tsokkos Hotels has an ROCE of 1.7%. On its own, that's a low figure but it's around the 1.5% average generated by the Hospitality industry.
View our latest analysis for A. Tsokkos Hotels
Historical performance is a great place to start when researching a stock so above you can see the gauge for A. Tsokkos Hotels' ROCE against it's prior returns. If you'd like to look at how A. Tsokkos Hotels has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From A. Tsokkos Hotels' ROCE Trend?
When we looked at the ROCE trend at A. Tsokkos Hotels, we didn't gain much confidence. To be more specific, ROCE has fallen from 3.8% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. 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, A. Tsokkos Hotels has done well to pay down its current liabilities to 11% of total assets. So we could link some of this to the decrease in ROCE. 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.
The Key Takeaway
From the above analysis, we find it rather worrisome that returns on capital and sales for A. Tsokkos Hotels have fallen, meanwhile the business is employing more capital than it was five years ago. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 205%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
If you'd like to know more about A. Tsokkos Hotels, we've spotted 4 warning signs, and 1 of them is potentially serious.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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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About CSE:TSH
A. Tsokkos Hotels
Engages in the operation of a chain of hotels and hotel apartments in Cyprus.
Good value slight.
