Returns On Capital Signal Tricky Times Ahead For OneSpaWorld Holdings (NASDAQ:OSW)
If you're looking for a multi-bagger, there's a few things to 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at OneSpaWorld Holdings (NASDAQ:OSW) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for OneSpaWorld Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.089 = US$56m ÷ (US$715m - US$81m) (Based on the trailing twelve months to December 2023).
Thus, OneSpaWorld Holdings has an ROCE of 8.9%. In absolute terms, that's a low return but it's around the Consumer Services industry average of 7.6%.
Check out our latest analysis for OneSpaWorld Holdings
Above you can see how the current ROCE for OneSpaWorld Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for OneSpaWorld Holdings .
How Are Returns Trending?
In terms of OneSpaWorld Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 21%, but since then they've fallen to 8.9%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From OneSpaWorld Holdings' ROCE
While returns have fallen for OneSpaWorld Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 14% over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
Like most companies, OneSpaWorld Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.
While OneSpaWorld 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.
