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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Ten Entertainment Group (LON:TEG), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Ten Entertainment Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.012 = UK£2.6m ÷ (UK£268m - UK£51m) (Based on the trailing twelve months to June 2020).
So, Ten Entertainment Group has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 6.0%.
In the above chart we have measured Ten Entertainment Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Ten Entertainment Group's ROCE Trend?
We weren't thrilled with the trend because Ten Entertainment Group's ROCE has reduced by 90% over the last five years, while the business employed 334% more capital. Usually this isn't ideal, but given Ten Entertainment Group conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Ten Entertainment Group probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
The Bottom Line
We're a bit apprehensive about Ten Entertainment Group because despite more capital being deployed in the business, returns on that capital and sales have both fallen. And, the stock has remained flat over the last three years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
If you want to know some of the risks facing Ten Entertainment Group we've found 3 warning signs (1 can't be ignored!) that you should be aware of before investing here.
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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