Café de Coral Holdings (HKG:341) Will Want To Turn Around Its Return Trends

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Café de Coral Holdings (HKG:341), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for Café de Coral Holdings, this is the formula:

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

0.03 = HK$161m ÷ (HK$7.1b - HK$1.7b) (Based on the trailing twelve months to September 2021).

Thus, Café de Coral Holdings has an ROCE of 3.0%. On its own that's a low return, but compared to the average of 1.5% generated by the Hospitality industry, it's much better.

View our latest analysis for Café de Coral Holdings

Above you can see how the current ROCE for Café de Coral Holdings 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 Café de Coral Holdings here for free.

So How Is Café de Coral Holdings' ROCE Trending?

In terms of Café de Coral Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 19% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Café de Coral Holdings' ROCE

To conclude, we've found that Café de Coral Holdings is reinvesting in the business, but returns have been falling. Since the stock has declined 40% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know about the risks facing Café de Coral Holdings, we've discovered 2 warning signs that you should be aware of.

While Café de Coral Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.