Stock Analysis

The Return Trends At Abu Dhabi National Hotels Company PJSC (ADX:ADNH) Look Promising

ADX:ADNH
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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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, we've noticed some promising trends at Abu Dhabi National Hotels Company PJSC (ADX:ADNH) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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 Abu Dhabi National Hotels Company PJSC, this is the formula:

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

0.037 = د.إ320m ÷ (د.إ9.7b - د.إ1.0b) (Based on the trailing twelve months to March 2023).

Therefore, Abu Dhabi National Hotels Company PJSC has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 5.9%.

Check out our latest analysis for Abu Dhabi National Hotels Company PJSC

roce
ADX:ADNH Return on Capital Employed July 7th 2023

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Abu Dhabi National Hotels Company PJSC has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 105% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line

In summary, we're delighted to see that Abu Dhabi National Hotels Company PJSC has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 193% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Abu Dhabi National Hotels Company PJSC does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Abu Dhabi National Hotels Company PJSC 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.

Valuation is complex, but we're helping make it simple.

Find out whether Abu Dhabi National Hotels Company PJSC is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.