Will National Corporation for Tourism and Hotels (ADX:NCTH) Multiply In Value Going Forward?

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after briefly looking over the numbers, we don't think National Corporation for Tourism and Hotels (ADX:NCTH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on National Corporation for Tourism and Hotels is:

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

0.044 = د.إ87m ÷ (د.إ2.3b - د.إ344m) (Based on the trailing twelve months to September 2020).

Thus, National Corporation for Tourism and Hotels has an ROCE of 4.4%. On its own that's a low return, but compared to the average of 3.0% generated by the Hospitality industry, it's much better.

See 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 want to delve into the historical earnings, revenue and cash flow of National Corporation for Tourism and Hotels, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at National Corporation for Tourism and Hotels doesn't inspire confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 4.4%. 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'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.

On a related note, National Corporation for Tourism and Hotels has decreased its current liabilities to 15% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

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

In summary, National Corporation for Tourism and Hotels is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing to note, we've identified 1 warning sign with National Corporation for Tourism and Hotels and understanding it should be part of your investment process.

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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