If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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, the ROCE of Atour Lifestyle Holdings (NASDAQ:ATAT) looks great, so lets see what the trend can tell us.

Understanding 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. To calculate this metric for Atour Lifestyle Holdings, this is the formula:

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

0.27 = CN¥1.3b ÷ (CN¥7.3b - CN¥2.5b) (Based on the trailing twelve months to June 2024).

Therefore, Atour Lifestyle Holdings has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 10%.

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 analyst report for Atour Lifestyle Holdings .

What Does the ROCE Trend For Atour Lifestyle Holdings Tell Us?

The trends we've noticed at Atour Lifestyle Holdings are quite reassuring. The data shows that returns on capital have increased substantially over the last four years to 27%. Basically the business is earning more per dollar of capital invested and in addition to that, 361% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Atour Lifestyle Holdings has. And with a respectable 73% 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. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Atour Lifestyle Holdings does have some risks though, and we've spotted 2 warning signs for Atour Lifestyle Holdings that you might be interested in.

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.