Investors Met With Slowing Returns on Capital At Lottery (ASX:TLC)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Lottery (ASX:TLC) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Lottery, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.17 = AU$601m ÷ (AU$4.7b - AU$1.2b) (Based on the trailing twelve months to December 2023).

So, Lottery has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 7.3% generated by the Hospitality industry.

View our latest analysis for Lottery

roce

Above you can see how the current ROCE for Lottery 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 Lottery .

The Trend Of ROCE

Things have been pretty stable at Lottery, with its capital employed and returns on that capital staying somewhat the same for the last two years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Lottery to be a multi-bagger going forward. That being the case, it makes sense that Lottery has been paying out 96% of its earnings to its shareholders. These mature businesses typically have reliable earnings and not many places to reinvest them, so the next best option is to put the earnings into shareholders pockets.

What We Can Learn From Lottery's ROCE

In a nutshell, Lottery has been trudging along with the same returns from the same amount of capital over the last two years. Since the stock has gained an impressive 9.1% over the last year, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing to note, we've identified 1 warning sign with Lottery and understanding it should be part of your investment process.

While Lottery may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.