If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Loungers' (LON:LGRS) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Loungers, this is the formula:

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

0.065 = UK£19m ÷ (UK£347m - UK£61m) (Based on the trailing twelve months to October 2022).

Thus, Loungers has an ROCE of 6.5%.  On its own, that's a low figure but it's around the 7.6% average generated by the Hospitality industry.

View our latest analysis for Loungers  roce

In the above chart we have measured Loungers' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Loungers here  for free.

What Can We Tell From Loungers' ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 6.5%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 107%. So we're very much inspired by what we're seeing at Loungers thanks to its ability to profitably reinvest capital.

What We Can Learn From Loungers' ROCE

All in all, it's terrific to see that Loungers is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 43% to shareholders over the last three years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Loungers can keep these trends up, it could have a bright future ahead.

While Loungers looks impressive, no company is worth an infinite price. The  intrinsic value infographic in our free research report  helps visualize whether LGRS is currently trading for a fair price.

For those who like to invest in solid companies, check out this freelist of companies with solid balance sheets and high returns on equity.

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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