What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 S.A.I. Leisure Group (HKG:1832), it didn't seem to tick all of these boxes.
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 S.A.I. Leisure Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = US$5.6m ÷ (US$136m - US$14m) (Based on the trailing twelve months to June 2020).
Therefore, S.A.I. Leisure Group has an ROCE of 4.6%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 3.7%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for S.A.I. Leisure Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of S.A.I. Leisure Group, check out these free graphs here.
How Are Returns Trending?
In terms of S.A.I. Leisure Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 26% over the last four years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.
The Bottom Line On S.A.I. Leisure Group's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for S.A.I. Leisure Group have fallen, meanwhile the business is employing more capital than it was four years ago. Long term shareholders who've owned the stock over the last year have experienced a 53% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
If you want to know some of the risks facing S.A.I. Leisure Group we've found 4 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.
While S.A.I. Leisure Group 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. 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.
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