There Are Reasons To Feel Uneasy About SSAW Hotels & Resorts GroupLtd's (SZSE:301073) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at SSAW Hotels & Resorts GroupLtd (SZSE:301073) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 SSAW Hotels & Resorts GroupLtd is:

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

0.04 = CN¥85m ÷ (CN¥2.4b - CN¥308m) (Based on the trailing twelve months to September 2023).

Thus, SSAW Hotels & Resorts GroupLtd has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 8.4%.

View 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're interested, you can view the analysts predictions in our free analyst report for SSAW Hotels & Resorts GroupLtd .

How Are Returns Trending?

When we looked at the ROCE trend at SSAW Hotels & Resorts GroupLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.0% from 28% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, SSAW Hotels & Resorts GroupLtd has done well to pay down its current liabilities to 13% of total assets. So we could link some of this to the decrease in ROCE. 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.

What We Can Learn From SSAW Hotels & Resorts GroupLtd's ROCE

While returns have fallen for SSAW Hotels & Resorts GroupLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 61% over the last year, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

SSAW Hotels & Resorts GroupLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While SSAW Hotels & Resorts GroupLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.