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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. Although, when we looked at Viva Leisure (ASX:VVA), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Viva Leisure is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.054 = AU$25m ÷ (AU$542m - AU$77m) (Based on the trailing twelve months to June 2024).
Thus, Viva Leisure has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 9.7%.
See our latest analysis for Viva Leisure
In the above chart we have measured Viva Leisure's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Viva Leisure .
So How Is Viva Leisure's ROCE Trending?
The trend of ROCE doesn't look fantastic because it's fallen from 16% five years ago, while the business's capital employed increased by 1,210%. Usually this isn't ideal, but given Viva Leisure conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Viva Leisure probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.
In Conclusion...
While returns have fallen for Viva Leisure in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 29% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.