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If we want to identify the next multi-bagger, there are some key trends to look for.A common approach is to try to find a company that has return Capital Employed (ROCE) continues to increase while growing quantity capital employed. This shows us that it is a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns.So when we scan our eyes RCI Hotel Holdings, Inc. (NASDAQ: RICK ) ROCE is trending, and we like what we see.
What is return on capital employed (ROCE)?
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profits (return) relative to the capital employed in the business. To calculate this metric for RCI Hospitality Holdings, the formula is as follows:
Return on capital employed = Earnings before interest and tax (EBIT) ÷ (Total assets – Current liabilities)
0.12 = $67 million ÷ ($611 million – $48 million) (Based on trailing 12 months to September 2023).
therefore, RCI Hospitality Holdings has an ROCE of 12%. By itself, that’s a standard rate of return, but it’s much better than the 9.4% the hotel industry generates.
Check out our latest analysis for RCI Hospitality Holdings
In the chart above, we measure prior ROCE against RCI Hospitality Holdings’ prior performance, but the future is arguably more important. If you’d like, you can check out the RCI Hospitality Holdings analyst forecasts here: free.
What trends in ROCE can tell us
While return on capital is good, it hasn’t changed much. The company has increased capital employed by 90% over the past five years, with return on capital holding steady at 12%. However, with a mid-range ROCE of 12%, it’s good to see that the business is continuing to reinvest at such a good rate of return. Over a long period of time, such returns may not be too exciting, but as long as they remain consistent, they can pay off in terms of share price returns.
bottom line
Ultimately, RCI Hospitality Holdings has proven its ability to fully reinvest capital at a good rate of return. Long-term investors will be thrilled with the 182% return they’ve received over the past five years. So while investors appear to recognize these promising trends, we still think the stock deserves further research.
One more thing to note, we have established 3 warning signs Working with RCI Hospitality Holdings and understanding these should be part of your investment process.
If you’re looking for a reliable company with great income, check this out free List of companies with good balance sheets and decent returns on equity.
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This article from Simply Wall St is general in nature. We only use unbiased methodologies to provide commentary based on historical data and analyst forecasts, and our articles are not intended to provide financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or your financial situation. Our goal is to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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