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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, from a first glance at Hollywood Bowl Group (LON:BOWL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Hollywood Bowl Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = UK£61m ÷ (UK£418m - UK£45m) (Based on the trailing twelve months to September 2024).
Thus, Hollywood Bowl Group has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 7.5% generated by the Hospitality industry.
Check out our latest analysis for Hollywood Bowl Group
In the above chart we have measured Hollywood Bowl Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hollywood Bowl Group for free.
How Are Returns Trending?
On the surface, the trend of ROCE at Hollywood Bowl Group doesn't inspire confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 16%. However it looks like Hollywood Bowl Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On Hollywood Bowl Group's ROCE
To conclude, we've found that Hollywood Bowl Group is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 9.1% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
One more thing to note, we've identified 1 warning sign with Hollywood Bowl Group and understanding it should be part of your investment process.