Be Wary Of Emperor Entertainment Hotel (HKG:296) And Its Returns On 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? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Emperor Entertainment Hotel (HKG:296), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Emperor Entertainment Hotel:

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

0.0077 = HK$36m ÷ (HK$4.9b - HK$201m) (Based on the trailing twelve months to March 2024).

Therefore, Emperor Entertainment Hotel has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 6.9%.

Check out our latest analysis for Emperor Entertainment Hotel

Historical performance is a great place to start when researching a stock so above you can see the gauge for Emperor Entertainment Hotel's 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 Emperor Entertainment Hotel.

What Can We Tell From Emperor Entertainment Hotel's ROCE Trend?

In terms of Emperor Entertainment Hotel's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 4.7% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Emperor Entertainment Hotel becoming one if things continue as they have.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Unsurprisingly then, the stock has dived 74% over the last five years, so investors are recognizing these changes and don't like the company's prospects. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Emperor Entertainment Hotel we've found 4 warning signs (1 can't be ignored!) that you should be aware of before investing here.

While Emperor Entertainment Hotel 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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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.