Finding a business that has the potential to grow significantly isn't easy, but it is possible if you look at a few key financial indicators. A common approach is to try to find a company with returns on capital employed (ROCE) which increases, in line with growth Rising capital employed. If you see this, it usually means this is a company with a great business model and plenty of profitable reinvestment opportunities. In light of this, when we examined Adventure (EST: 6030) and its ROCE trend, we weren't really thrilled.
Return on capital employed (ROCE): what is it?
If you've never worked with ROCE before, it measures the “return” (pre-tax profit) that a company generates from the capital employed in its business. The formula for this calculation on Adventure is:
Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.088 = JP¥1.7 billion ÷ (JP¥29 billion – JP¥9.3 billion) (Based on the last twelve months to September 2024).
SO, Adventure has an ROCE of 8.8%. In absolute terms this is a low return, but it is around the hotel sector average of 9.7%.
Check out our latest analysis for Adventure
In the chart above, we measured Adventure's past ROCE against its past performance, but the future is arguably more important. If you want to see what analysts are predicting for the future, you should check out our free analyst report for Adventure .
The ROCE trend
There are better returns on capital than we see at Adventure. Over the past five years, ROCE has remained relatively stable at around 8.8%, and the company has deployed 265% more capital into its operations. Given that the company has increased the amount of capital employed, it appears that the investments made are simply not providing a high return on capital.
One last thing to note, although ROCE has remained relatively stable over the past five years, the reduction in current liabilities to 32% of total assets is a good thing to see from a business owner's perspective . This can eliminate some of the risks inherent in operations because the company has fewer outstanding obligations to its suppliers and/or short-term creditors than before.
The essentials
In conclusion, Adventure invested more capital into the business, but the returns on that capital did not increase. Given that the stock is down 33% over the past five years, investors may not be too optimistic that this trend will improve either. Either way, the title doesn't exhibit the characteristics of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have better luck elsewhere.
If you want to know what risks Adventure faces, we found out 2 warning signs which you should be aware of.
For those who like to invest in solid businesses, look at this free list of companies with strong balance sheets and high returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to constitute financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your objectives or your financial situation. Our goal is to provide you with targeted, long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
