Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. And in light of that, the trends we're seeing at Atour Lifestyle Holdings' (NASDAQ:ATAT) look very promising so lets take a look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.22 = CN¥924m ÷ (CN¥6.6b - CN¥2.4b) (Based on the trailing twelve months to December 2023).

So, Atour Lifestyle Holdings has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 9.5% earned by companies in a similar industry.

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'd like, you can check out the forecasts from the analysts covering Atour Lifestyle Holdings for free.

So How Is Atour Lifestyle Holdings' ROCE Trending?

Investors would be pleased with what's happening at Atour Lifestyle Holdings. The data shows that returns on capital have increased substantially over the last four years to 22%. The amount of capital employed has increased too, by 333%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line

All in all, it's terrific to see that Atour Lifestyle Holdings is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 23% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Like most companies, Atour Lifestyle Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.