Advertisement
Australia markets closed
  • ALL ORDS

    7,943.60
    -31.20 (-0.39%)
     
  • AUD/USD

    0.6603
    -0.0015 (-0.22%)
     
  • ASX 200

    7,700.30
    -24.00 (-0.31%)
     
  • OIL

    78.26
    -0.19 (-0.24%)
     
  • GOLD

    2,336.30
    -12.80 (-0.54%)
     
  • Bitcoin AUD

    99,485.47
    -1,034.07 (-1.03%)
     
  • CMC Crypto 200

    1,357.10
    -31.06 (-2.24%)
     

There Are Reasons To Feel Uneasy About Aristocrat Leisure's (ASX:ALL) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Aristocrat Leisure (ASX:ALL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. To calculate this metric for Aristocrat Leisure, this is the formula:

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

0.17 = AU$1.5b ÷ (AU$10b - AU$1.3b) (Based on the trailing twelve months to September 2022).

ADVERTISEMENT

Therefore, Aristocrat Leisure has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 8.1% it's much better.

Check out our latest analysis for Aristocrat Leisure

roce
roce

Above you can see how the current ROCE for Aristocrat Leisure compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Aristocrat Leisure.

So How Is Aristocrat Leisure's ROCE Trending?

When we looked at the ROCE trend at Aristocrat Leisure, we didn't gain much confidence. To be more specific, ROCE has fallen from 30% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Aristocrat Leisure's ROCE

While returns have fallen for Aristocrat Leisure in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 49% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you're still interested in Aristocrat Leisure it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Aristocrat Leisure isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here