Returns On Capital At RCI Hospitality Holdings (NASDAQ:RICK) Have Hit The Brakes
There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So, when we ran our eye over RCI Hospitality Holdings' (NASDAQ:RICK) trend of ROCE, we liked what we saw.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for RCI Hospitality Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$67m ÷ (US$611m - US$48m) (Based on the trailing twelve months to September 2023).
Thus, RCI Hospitality Holdings has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.4% generated by the Hospitality industry.
See our latest analysis for RCI Hospitality Holdings
In the above chart we have measured RCI Hospitality Holdings' 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 RCI Hospitality Holdings here for free.
What The Trend Of ROCE Can Tell Us
While the returns on capital are good, they haven't moved much. The company has employed 90% more capital in the last five years, and the returns on that capital have remained stable at 12%. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The Bottom Line
In the end, RCI Hospitality Holdings has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 182% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
One more thing to note, we've identified 3 warning signs with RCI Hospitality Holdings and understanding these should be part of your investment process.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
