Our Take On The Returns On Capital At Lampsa Hellenic Hotels (ATH:LAMPS)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Lampsa Hellenic Hotels (ATH:LAMPS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Lampsa Hellenic Hotels is:

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

0.01 = €2.3m ÷ (€261m - €33m) (Based on the trailing twelve months to June 2020).

Therefore, Lampsa Hellenic Hotels has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 6.5%.

See our latest analysis for Lampsa Hellenic Hotels

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lampsa Hellenic Hotels' ROCE against it's prior returns. If you'd like to look at how Lampsa Hellenic Hotels has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Lampsa Hellenic Hotels doesn't inspire confidence. Around five years ago the returns on capital were 5.0%, but since then they've fallen to 1.0%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Lampsa Hellenic Hotels' ROCE

We're a bit apprehensive about Lampsa Hellenic Hotels because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Despite the concerning underlying trends, the stock has actually gained 22% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to continue researching Lampsa Hellenic Hotels, you might be interested to know about the 1 warning sign that our analysis has discovered.

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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This article by Simply Wall St is general in nature. 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.
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