Returns Are Gaining Momentum At Asia Standard Hotel Group (HKG:292)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Asia Standard Hotel Group's (HKG:292) returns on capital, so let's have a look.

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. The formula for this calculation on Asia Standard Hotel Group is:

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

0.072 = HK$618m ÷ (HK$12b - HK$3.4b) (Based on the trailing twelve months to September 2020).

Thus, Asia Standard Hotel Group has an ROCE of 7.2%. On its own that's a low return, but compared to the average of 3.3% generated by the Hospitality industry, it's much better.

See our latest analysis for Asia Standard Hotel Group

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

What Can We Tell From Asia Standard Hotel Group's ROCE Trend?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 7.2%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 78%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 28% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line

In summary, it's great to see that Asia Standard Hotel Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Given the stock has declined 51% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

One final note, you should learn about the 2 warning signs we've spotted with Asia Standard Hotel Group (including 1 which shouldn't be ignored) .

While Asia Standard Hotel Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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