Returns On Capital At Hostelworld Group (LON:HSW) Have Hit The Brakes
What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. However, after briefly looking over the numbers, we don't think Hostelworld Group (LON:HSW) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
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 Hostelworld Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.072 = €5.1m ÷ (€95m - €24m) (Based on the trailing twelve months to December 2023).
Thus, Hostelworld Group has an ROCE of 7.2%. Even though it's in line with the industry average of 7.5%, it's still a low return by itself.
View our latest analysis for Hostelworld Group
In the above chart we have measured Hostelworld Group'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 Hostelworld Group .
How Are Returns Trending?
Over the past five years, Hostelworld Group's ROCE has remained relatively flat while the business is using 48% less capital than before. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. In addition to that, since the ROCE doesn't scream "quality" at 7.2%, it's hard to get excited about these developments.
Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 26% of total assets, this reported ROCE would probably be less than7.2% because total capital employed would be higher.The 7.2% ROCE could be even lower if current liabilities weren't 26% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.
Our Take On Hostelworld Group's ROCE
Overall, we're not ecstatic to see Hostelworld Group reducing the amount of capital it employs in the business. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
On a separate note, we've found 2 warning signs for Hostelworld Group you'll probably want to know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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