SSAW Hotels & Resorts GroupLtd (SZSE:301073) Could Be Struggling To Allocate Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating SSAW Hotels & Resorts GroupLtd (SZSE:301073), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on SSAW Hotels & Resorts GroupLtd is:

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

0.044 = CN¥94m ÷ (CN¥2.4b - CN¥294m) (Based on the trailing twelve months to March 2024).

Thus, SSAW Hotels & Resorts GroupLtd has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 11%.

Check out our latest analysis for SSAW Hotels & Resorts GroupLtd

In the above chart we have measured SSAW Hotels & Resorts GroupLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering SSAW Hotels & Resorts GroupLtd for free.

So How Is SSAW Hotels & Resorts GroupLtd's ROCE Trending?

When we looked at the ROCE trend at SSAW Hotels & Resorts GroupLtd, we didn't gain much confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 4.4%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, SSAW Hotels & Resorts GroupLtd has decreased its current liabilities to 12% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On SSAW Hotels & Resorts GroupLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for SSAW Hotels & Resorts GroupLtd. These growth trends haven't led to growth returns though, since the stock has fallen 48% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, SSAW Hotels & Resorts GroupLtd does come with some risks, and we've found 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com