In This Article:
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Hollywood Bowl Group (LON:BOWL), it didn't seem to tick all of these boxes.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Hollywood Bowl Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.021 = UK£5.6m ÷ (UK£301m - UK£32m) (Based on the trailing twelve months to September 2021).
So, Hollywood Bowl Group has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 4.0%.
View 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 here for free.
What Can We Tell From Hollywood Bowl Group's ROCE Trend?
On the surface, the trend of ROCE at Hollywood Bowl Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.1% from 16% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.
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. Although the market must be expecting these trends to improve because the stock has gained 76% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
On a separate note, we've found 1 warning sign for Hollywood Bowl Group you'll probably want to know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.