Investors Could Be Concerned With 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? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 National Corporation for Tourism and Hotels (ADX:NCTH) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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

0.037 = د.إ75m ÷ (د.إ2.4b - د.إ374m) (Based on the trailing twelve months to March 2021).

So, National Corporation for Tourism and Hotels has an ROCE of 3.7%. Even though it's in line with the industry average of 3.9%, it's still a low return by itself.

Check out 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're interested in investigating National Corporation for Tourism and Hotels' past further, check out 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. To be more specific, ROCE has fallen from 15% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by National Corporation for Tourism and Hotels' reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last five years has been flat. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

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 1 is concerning!) that you should know about.

While National Corporation for Tourism and Hotels 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.

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