Should You Be Impressed By Hotel Chocolat Group's (LON:HOTC) Returns on Capital?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Hotel Chocolat Group (LON:HOTC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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 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%. In absolute terms, that's a low return and it also under-performs the Food industry average of 8.7%.

Check out 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'd like, you can check out the forecasts from the analysts covering Hotel Chocolat Group here for free.

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%. 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. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Hotel Chocolat Group's earnings and if they change as a result from the capital raise.

On a related note, Hotel Chocolat Group has decreased its current liabilities to 27% of total assets. So we could link some of this to the decrease in ROCE. 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 Key Takeaway

Bringing it all together, while we're somewhat encouraged by Hotel Chocolat Group's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 3.8% 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.

Hotel Chocolat Group does have some risks though, and we've spotted 1 warning sign for Hotel Chocolat Group that you might be interested in.

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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