Atour Lifestyle Holdings (NASDAQ:ATAT) Might Have The Makings Of A Multi-Bagger
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Atour Lifestyle Holdings (NASDAQ:ATAT) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Atour Lifestyle Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = CN¥439m ÷ (CN¥5.5b - CN¥1.7b) (Based on the trailing twelve months to June 2023).
So, Atour Lifestyle Holdings has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.3% generated by the Hospitality industry.
See our latest analysis for Atour Lifestyle Holdings
In the above chart we have measured Atour Lifestyle Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
We like the trends that we're seeing from Atour Lifestyle Holdings. The data shows that returns on capital have increased substantially over the last three years to 12%. Basically the business is earning more per dollar of capital invested and in addition to that, 268% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
One more thing to note, Atour Lifestyle Holdings has decreased current liabilities to 31% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Atour Lifestyle Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
What We Can Learn From Atour Lifestyle Holdings' ROCE
In summary, it's great to see that Atour Lifestyle Holdings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with a respectable 46% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.
While Atour Lifestyle Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
