Yahoo Finance Capital Allocation Trends At Hotel Chocolat Group (LON:HOTC) Aren't Ideal
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Hotel Chocolat Group (LON:HOTC), we don't think it's current trends fit the mold of a multi-bagger.
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 Hotel Chocolat Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.042 = UK£4.6m ÷ (UK£177m - UK£67m) (Based on the trailing twelve months to December 2020).
So, Hotel Chocolat Group has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Food industry average of 8.6%.
See our latest analysis for Hotel Chocolat Group
In the above chart we have measured Hotel Chocolat 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 Hotel Chocolat Group here for free.
The Trend Of ROCE
Unfortunately, the trend isn't great with ROCE falling from 35% five years ago, while capital employed has grown 436%. That being said, Hotel Chocolat Group raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Hotel Chocolat Group 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.
On a related note, Hotel Chocolat Group has decreased its current liabilities to 38% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
What We Can Learn From Hotel Chocolat Group's ROCE
To conclude, we've found that Hotel Chocolat Group is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 3.3% over the last three years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
Hotel Chocolat Group could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
While Hotel Chocolat Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
This article by Simply Wall St is general in nature. 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.
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