Hotel Chocolat Group (LON:HOTC) will want to reverse its comeback trends

Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we look at a few key financial metrics. Typically, we will want to notice a growth trend to return to on capital employed (ROCE) and at the same time, a based capital employed. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. That said, at a first glance at Chocolate Hotel Group (LON:HOTC) we’re not jumping off our chairs on the yield trend, but taking a closer look.

Understanding return on capital employed (ROCE)

For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. To calculate this metric for Hotel Chocolat Group, here is the formula:

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

0.11 = £12m ÷ (£156m – £52m) (Based on the last twelve months to June 2021).

So, Hotel Chocolat Group has a ROCE of 11%. This is a fairly standard return and is in line with the industry average of 11%.

Check out our latest review for Hotel Chocolat Group

AIM: HOTC Return on Capital Employed January 25, 2022

In the chart above, we measured Hotel Chocolat Group’s past ROCE against its past performance, but the future is arguably more important. If you wish, you can view analyst forecasts covering Hotel Chocolat Group here for free.

What the ROCE trend can tell us

On the surface, the ROCE trend at Hotel Chocolat Group does not inspire confidence. Over the past five years, capital returns have declined to 11% from 30% five years ago. However, given that capital employed and revenue have both increased, it appears that the company is currently continuing to grow, following short-term returns. And if the capital increase generates additional returns, the company, and therefore the shareholders, will benefit in the long term.

The essential

In summary, despite lower returns in the short term, we are encouraged to see that Hotel Chocolat Group is reinvesting for growth and has thus increased its sales. Moreover, the stock has climbed 81% in the last five years, it would seem that investors are optimistic about the future. So while the underlying trends can already be explained by investors, we still think this stock deserves further investigation.

Finally we found 2 warning signs for Hotel Chocolat Group (1 makes us a little uneasy) that you should be aware of.

Although Hotel Chocolat Group doesn’t get the highest return, check this out free list of companies that achieve high returns on equity with strong balance sheets.

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 be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.