Here's What's Concerning About National Corporation for Tourism and Hotels' (ADX:NCTH) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at National Corporation for Tourism and Hotels (ADX:NCTH), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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 National Corporation for Tourism and Hotels, this is the formula:

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

0.029 = د.إ78m ÷ (د.إ2.9b - د.إ247m) (Based on the trailing twelve months to March 2022).

Thus, National Corporation for Tourism and Hotels has an ROCE of 2.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 2.7%.

View our latest analysis for National Corporation for Tourism and Hotels

Historical performance is a great place to start when researching a stock so above you can see the gauge for National Corporation for Tourism and Hotels' ROCE against it's prior returns. If you'd like to look at how National Corporation for Tourism and Hotels 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

In terms of National Corporation for Tourism and Hotels' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.9% from 13% five years ago. However it looks like National Corporation for Tourism and Hotels might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On National Corporation for Tourism and Hotels' ROCE

To conclude, we've found that National Corporation for Tourism and Hotels is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 42% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for National Corporation for Tourism and Hotels (of which 2 make us uncomfortable!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.