Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Lottery (ASX:TLC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Lottery, this is the formula:

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

0.17 = AU$600m ÷ (AU$4.7b - AU$1.2b) (Based on the trailing twelve months to December 2023).

Therefore, Lottery has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 10.0% generated by the Hospitality industry.

View our latest analysis for Lottery

In the above chart we have measured Lottery'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 Lottery for free.

What Does the ROCE Trend For Lottery Tell Us?

There hasn't been much to report for Lottery's returns and its level of capital employed because both metrics have been steady for the past two years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Lottery to be a multi-bagger going forward. On top of that you'll notice that Lottery has been paying out a large portion (95%) of earnings in the form of dividends to shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.

The Key Takeaway

In a nutshell, Lottery has been trudging along with the same returns from the same amount of capital over the last two years. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Lottery has the makings of a multi-bagger.