Returns On Capital At Lampsa Hellenic Hotels (ATH:LAMPS) Paint An Interesting Picture

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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.

Understanding 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. 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).

Thus, 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 6.3%.

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 want to delve into the historical earnings, revenue and cash flow of Lampsa Hellenic Hotels, check out these free graphs here.

What Does the ROCE Trend For Lampsa Hellenic Hotels Tell Us?

When we looked at the ROCE trend at Lampsa Hellenic Hotels, we didn't gain much 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. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

In summary, we're somewhat concerned by Lampsa Hellenic Hotels' diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 14% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know about the risks facing Lampsa Hellenic Hotels, we've discovered 1 warning sign that you should be aware of.

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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