Yahoo Finance Should We Be Excited About The Trends Of Returns At Hollywood Bowl Group (LON:BOWL)?
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at Hollywood Bowl Group (LON:BOWL) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)
0.038 = UK£9.9m ÷ (UK£291m - UK£30m) (Based on the trailing twelve months to September 2020).
Thus, Hollywood Bowl Group has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 5.8%.
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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Hollywood Bowl Group's ROCE Trend?
The trend of ROCE doesn't look fantastic because it's fallen from 12% five years ago, while the business's capital employed increased by 150%. Usually this isn't ideal, but given Hollywood Bowl Group conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Hollywood Bowl Group might not have received a full period of earnings contribution from it.
What We Can Learn From Hollywood Bowl Group's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Hollywood Bowl Group have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 7.2% return to shareholders who held over the last three years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
One more thing to note, we've identified 3 warning signs with Hollywood Bowl Group and understanding them should be part of your investment process.
While Hollywood Bowl 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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