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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? 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. With that in mind, the ROCE of Hollywood Bowl Group (LON:BOWL) looks decent, right now, so lets see what the trend of returns can tell us.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Hollywood Bowl Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = UK£64m ÷ (UK£400m - UK£43m) (Based on the trailing twelve months to March 2024).
Thus, Hollywood Bowl Group has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 7.5% generated by the Hospitality industry.
See our latest analysis for Hollywood Bowl Group
Above you can see how the current ROCE for Hollywood Bowl Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Hollywood Bowl Group .
The Trend Of ROCE
While the current returns on capital are decent, they haven't changed much. The company has consistently earned 18% for the last five years, and the capital employed within the business has risen 169% in that time. Since 18% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Bottom Line On Hollywood Bowl Group's ROCE
The main thing to remember is that Hollywood Bowl Group has proven its ability to continually reinvest at respectable rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
Hollywood Bowl Group does have some risks though, and we've spotted 2 warning signs for Hollywood Bowl Group that you might be interested in.