To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Speaking of which, we noticed some great changes in Hostmore's (LON:MORE) returns on capital, so let's have a look.
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. The formula for this calculation on Hostmore is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = UK£9.6m ÷ (UK£236m - UK£48m) (Based on the trailing twelve months to January 2023).
So, Hostmore has an ROCE of 5.1%. On its own, that's a low figure but it's around the 5.9% average generated by the Hospitality industry.
Check out our latest analysis for Hostmore
Above you can see how the current ROCE for Hostmore compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hostmore.
How Are Returns Trending?
We're delighted to see that Hostmore is reaping rewards from its investments and has now broken into profitability. The company now earns 5.1% on its capital, because two years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
One more thing to note, Hostmore has decreased current liabilities to 20% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Hostmore has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
In Conclusion...
As discussed above, Hostmore appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Given the stock has declined 18% in the last year, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.