There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Les Hôtels de Paris (EPA:HDP) and its trend of ROCE, we really liked what we saw.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Les Hôtels de Paris is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0044 = €574k ÷ (€173m - €43m) (Based on the trailing twelve months to December 2019).
So, Les Hôtels de Paris has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 6.0%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Les Hôtels de Paris' ROCE against it's prior returns. If you're interested in investigating Les Hôtels de Paris' past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
We're delighted to see that Les Hôtels de Paris is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 0.4% on its capital. And unsurprisingly, like most companies trying to break into the black, Les Hôtels de Paris is utilizing 42% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
What We Can Learn From Les Hôtels de Paris' ROCE
Long story short, we're delighted to see that Les Hôtels de Paris' reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 22% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Les Hôtels de Paris (of which 2 shouldn't be ignored!) that you should know about.
While Les Hôtels de Paris 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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