Here's What's Concerning About Hotel Chocolat Group's (LON:HOTC) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Hotel Chocolat Group (LON:HOTC) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Hotel Chocolat Group, this is the formula:

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

0.042 = UK£4.6m ÷ (UK£177m - UK£67m) (Based on the trailing twelve months to December 2020).

So, Hotel Chocolat Group has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Food industry average of 8.5%.

See our latest analysis for Hotel Chocolat Group

In the above chart we have measured Hotel Chocolat 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 Does the ROCE Trend For Hotel Chocolat Group Tell Us?

We weren't thrilled with the trend because Hotel Chocolat Group's ROCE has reduced by 88% over the last five years, while the business employed 436% more capital. That being said, Hotel Chocolat Group raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Hotel Chocolat Group might not have received a full period of earnings contribution from it.

On a related note, Hotel Chocolat Group has decreased its current liabilities to 38% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Hotel Chocolat Group's ROCE

To conclude, we've found that Hotel Chocolat Group is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 88% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Hotel Chocolat Group could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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