Our Take On The Returns On Capital At Hotel Chocolat Group (LON:HOTC)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Hotel Chocolat Group (LON:HOTC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Hotel Chocolat Group:

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

0.038 = UK£3.9m ÷ (UK£143m - UK£38m) (Based on the trailing twelve months to June 2020).

Thus, Hotel Chocolat Group has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Food industry average of 7.6%.

View our latest analysis for Hotel Chocolat Group

Above you can see how the current ROCE for Hotel Chocolat Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Hotel Chocolat Group's ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 26% five years ago, while capital employed has grown 662%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. 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 side note, Hotel Chocolat Group has done well to pay down its current liabilities to 27% 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. 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 Bottom Line 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. And investors may be recognizing these trends since the stock has only returned a total of 10% to shareholders over the last three years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a final note, we've found 3 warning signs for Hotel Chocolat Group that we think you should be aware of.

While Hotel Chocolat 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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