Returns On Capital - An Important Metric For Asia Standard Hotel Group (HKG:292)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Asia Standard Hotel Group:

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%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 3.5%.

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're interested in investigating Asia Standard Hotel Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Asia Standard Hotel Group Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 7.2%. The amount of capital employed has increased too, by 78%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 28% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line On Asia Standard Hotel Group's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Asia Standard Hotel Group has. Given the stock has declined 50% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to know some of the risks facing Asia Standard Hotel Group we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While Asia Standard Hotel 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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