There Are Reasons To Feel Uneasy About BTG Hotels (Group)'s (SHSE:600258) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at BTG Hotels (Group) (SHSE:600258), it didn't seem to tick all of these boxes.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for BTG Hotels (Group), this is the formula:

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

0.068 = CN¥1.4b ÷ (CN¥25b - CN¥4.6b) (Based on the trailing twelve months to September 2024).

So, BTG Hotels (Group) has an ROCE of 6.8%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 8.7%.

See our latest analysis for BTG Hotels (Group)

Above you can see how the current ROCE for BTG Hotels (Group) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering BTG Hotels (Group) for free.

What Can We Tell From BTG Hotels (Group)'s ROCE Trend?

On the surface, the trend of ROCE at BTG Hotels (Group) doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.8% from 9.8% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From BTG Hotels (Group)'s ROCE

To conclude, we've found that BTG Hotels (Group) is reinvesting in the business, but returns have been falling. Since the stock has declined 17% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing BTG Hotels (Group), we've discovered 1 warning sign that you should be aware of.

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.