Did you know that there are some financial metrics that can give clues about a potential multi-bagger? Ideally, a company will show two trends; first, a growth return on invested capital (ROCE) and secondly, an increasing amount of the invested capital. This shows us that it is a compounding machine that can continuously reinvest its earnings back into the business and generate higher returns. In light of that, as we watched Ten Entertainment Group (LON:TEG) and its ROCE trend, we weren’t exactly thrilled.
Return on Capital Employed (ROCE): What is it?
If you haven’t worked with ROCE before, it measures the ‘return’ (before tax) a business generates on capital employed in its business. The formula for this calculation at Ten Entertainment Group is:
Return on capital employed = Earnings before interest and tax (EBIT) ÷ (Total assets – current liabilities)
0.13 = 33 million GBP ÷ (GBP 276m – GBP 26m) (Based on last 12 months to January 2023).
Therefore, Ten Entertainment Group has a ROCE of 13%. In absolute terms, this is a satisfactory return, but compared to the hotel industry average of 5.9%, it is much better.
See our latest analysis for Ten Entertainment Group
Above, you can see how the current ROCE for Ten Entertainment Group compares to its past return on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts predict going forward, you should check out our for free report for Ten Entertainment Group.
What the trend of ROCE can tell us
In terms of Ten Entertainment Group’s historical ROCE movements, the trend is not great. About five years ago the return on capital was 25%, but since then it has fallen to 13%. Although both revenue and the amount of assets employed in the company have increased, this may indicate that the company is investing in growth and the additional capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business and thus the shareholders will benefit in the long term.
On a side note, Ten Entertainment Group has done well in paying down its current liabilities to 9.3% of total assets. So we could link some of this to the drop in ROCE. This effectively means that their suppliers or short-term creditors finance less of the business, reducing certain elements of risk. Since the company basically funds more of its operations with its own money, one could argue that this has made the company less efficient at generating ROCE.
Although returns have fallen for Ten Entertainment Group in recent times, we are encouraged to see that sales are growing and that the company is reinvesting in its operations. These trends are beginning to be recognized by investors, as the stock has delivered a 21% gain for shareholders who have held over the past five years. Therefore, we would recommend taking a closer look at this stock to confirm whether it has the potential for a good investment.
One more thing: We have identified 4 warning signs with Ten Entertainment Group (at least 1 which is a bit uncomfortable) and it would definitely be helpful to understand these.
Although Ten Entertainment Group doesn’t earn the highest returns, check this out for free list of companies earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is of a general nature. We only provide commentary based on historical data and analyst forecasts 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 shares and does not take into account your goals or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account recent price-sensitive company announcements or qualitative material. Simply Wall St has no position in any listed stocks.