Yahoo Finance Returns On Capital Signal Tricky Times Ahead For Aristocrat Leisure (ASX:ALL)
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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 investigating Aristocrat Leisure (ASX:ALL), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Aristocrat Leisure is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = AU$1.3b ÷ (AU$9.2b - AU$1.1b) (Based on the trailing twelve months to March 2022).
Thus, Aristocrat Leisure has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 8.4% it's much better.
Check out our latest analysis for Aristocrat Leisure
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.
What Does the ROCE Trend For Aristocrat Leisure Tell Us?
When we looked at the ROCE trend at Aristocrat Leisure, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 16% from 28% five years ago. 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.
Our Take On Aristocrat Leisure's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Aristocrat Leisure is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 86% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
Like most companies, Aristocrat Leisure does come with some risks, and we've found 1 warning sign that you should be aware of.
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.
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