A. Tsokkos Hotels (CSE:TSH) May Have Issues Allocating Its Capital

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at A. Tsokkos Hotels (CSE:TSH), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for A. Tsokkos Hotels:

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

0.017 = €7.9m ÷ (€535m - €58m) (Based on the trailing twelve months to June 2020).

Therefore, A. Tsokkos Hotels has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 3.8%.

View our latest analysis for A. Tsokkos Hotels

Historical performance is a great place to start when researching a stock so above you can see the gauge for A. Tsokkos Hotels' ROCE against it's prior returns. If you're interested in investigating A. Tsokkos Hotels' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at A. Tsokkos Hotels doesn't inspire confidence. To be more specific, ROCE has fallen from 3.8% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, A. Tsokkos Hotels has decreased its current liabilities to 11% of total assets. That could partly explain why the ROCE has dropped. 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.

Our Take On A. Tsokkos Hotels' ROCE

In summary, we're somewhat concerned by A. Tsokkos Hotels' diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 30% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing: We've identified 5 warning signs with A. Tsokkos Hotels (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

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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