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Capital Allocation Trends At Aristocrat Leisure (ASX:ALL) Aren't Ideal

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Aristocrat Leisure (ASX:ALL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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. Analysts use this formula to calculate it for Aristocrat Leisure:

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

0.091 = AU$609m ÷ (AU$7.7b - AU$1.0b) (Based on the trailing twelve months to March 2021).

Therefore, Aristocrat Leisure has an ROCE of 9.1%. On its own, that's a low figure but it's around the 8.1% average generated by the Hospitality industry.

See our latest analysis for Aristocrat Leisure

roce
roce

In the above chart we have measured Aristocrat Leisure's 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 Aristocrat Leisure here for free.

The Trend Of ROCE

When we looked at the ROCE trend at Aristocrat Leisure, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.1% from 17% five years ago. However it looks like Aristocrat Leisure might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

To conclude, we've found that Aristocrat Leisure is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 233% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Aristocrat Leisure does have some risks though, and we've spotted 3 warning signs for Aristocrat Leisure that you might be interested in.

While Aristocrat Leisure isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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