Magnificent Hotel Investments (HKG:201) May Have Issues Allocating Its Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Magnificent Hotel Investments (HKG:201) we aren't filled with optimism, but let's investigate further.

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 Magnificent Hotel Investments is:

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

0.009 = HK$41m ÷ (HK$5.3b - HK$730m) (Based on the trailing twelve months to December 2023).

Therefore, Magnificent Hotel Investments has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 6.2%.

Check out our latest analysis for Magnificent Hotel Investments

Historical performance is a great place to start when researching a stock so above you can see the gauge for Magnificent Hotel Investments' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Magnificent Hotel Investments.

What Can We Tell From Magnificent Hotel Investments' ROCE Trend?

We are a bit worried about the trend of returns on capital at Magnificent Hotel Investments. About five years ago, returns on capital were 4.6%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Magnificent Hotel Investments becoming one if things continue as they have.

What We Can Learn From Magnificent Hotel Investments' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 60% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Like most companies, Magnificent Hotel Investments does come with some risks, and we've found 2 warning signs that you should be aware of.

While Magnificent Hotel Investments 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.