Should We Be Excited About The Trends Of Returns At Estoril Sol SGPS (ELI:ESON)?

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Estoril Sol SGPS (ELI:ESON), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Estoril Sol SGPS, this is the formula:

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

0.086 = €9.5m ÷ (€141m - €31m) (Based on the trailing twelve months to June 2020).

So, Estoril Sol SGPS has an ROCE of 8.6%. On its own that's a low return, but compared to the average of 6.4% generated by the Hospitality industry, it's much better.

Check out our latest analysis for Estoril Sol SGPS

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Estoril Sol SGPS' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Estoril Sol SGPS' ROCE Trend?

There are better returns on capital out there than what we're seeing at Estoril Sol SGPS. Over the past five years, ROCE has remained relatively flat at around 8.6% and the business has deployed 29% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Estoril Sol SGPS has done well to reduce current liabilities to 22% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line

As we've seen above, Estoril Sol SGPS' returns on capital haven't increased but it is reinvesting in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 34% in the last three years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

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

While Estoril Sol SGPS 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. 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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