NagaCorp (HKG:3918) May Have Issues Allocating Its Capital

August 27, 2023

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at NagaCorp (HKG:3918), it didn't seem to tick all of these boxes.

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. To calculate this metric for NagaCorp, this is the formula:

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

0.06 = US$149m ÷ (US$2.7b - US$184m) (Based on the trailing twelve months to June 2023).

Thus, NagaCorp has an ROCE of 6.0%. On its own that's a low return, but compared to the average of 5.0% generated by the Hospitality industry, it's much better.

Check out our latest analysis for NagaCorp

Above you can see how the current ROCE for NagaCorp compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering NagaCorp here for free.

What Does the ROCE Trend For NagaCorp Tell Us?

In terms of NagaCorp's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 17%, but since then they've fallen to 6.0%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From NagaCorp's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for NagaCorp. These growth trends haven't led to growth returns though, since the stock has fallen 44% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you're still interested in NagaCorp it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While NagaCorp 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.

Valuation is complex, but we're here to simplify it.

Discover if NagaCorp might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.