A. Tsokkos Hotels (CSE:TSH) Will Be Hoping To Turn Its Returns On Capital Around

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating A. Tsokkos Hotels (CSE:TSH), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on A. Tsokkos Hotels is:

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

0.015 = €6.9m ÷ (€527m - €61m) (Based on the trailing twelve months to June 2023).

Thus, A. Tsokkos Hotels has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 6.9%.

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.

What Does the ROCE Trend For A. Tsokkos Hotels Tell Us?

On the surface, the trend of ROCE at A. Tsokkos Hotels doesn't inspire confidence. To be more specific, ROCE has fallen from 4.8% over the last five years. 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.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that A. Tsokkos Hotels is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 48% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One final note, you should learn about the 3 warning signs we've spotted with A. Tsokkos Hotels (including 2 which can't be ignored) .

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.