Investors Met With Slowing Returns on Capital At Hollywood Bowl Group (LON:BOWL)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Hollywood Bowl Group (LON:BOWL) looks decent, right now, so lets see what the trend of returns can tell us.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Hollywood Bowl Group:

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

0.19 = UK£62m ÷ (UK£363m - UK£40m) (Based on the trailing twelve months to September 2022).

Therefore, Hollywood Bowl Group has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 6.2% generated by the Hospitality industry.

Check out our latest analysis for Hollywood Bowl Group

In the above chart we have measured Hollywood Bowl Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hollywood Bowl Group.

What Does the ROCE Trend For Hollywood Bowl Group Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 19% for the last five years, and the capital employed within the business has risen 152% in that time. 19% is a pretty standard return, and it provides some comfort knowing that Hollywood Bowl Group has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line

The main thing to remember is that Hollywood Bowl Group has proven its ability to continually reinvest at respectable rates of return. And given the stock has only risen 36% over the last five years, we'd suspect the market is beginning to recognize these trends. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

One more thing: We've identified 2 warning signs with Hollywood Bowl Group (at least 1 which is a bit concerning) , and understanding these would certainly be useful.

While Hollywood Bowl Group 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.