Be Wary Of Miramar Hotel and Investment Company (HKG:71) And Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Miramar Hotel and Investment Company (HKG:71), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Miramar Hotel and Investment Company is:

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

0.023 = HK$468m ÷ (HK$21b - HK$729m) (Based on the trailing twelve months to June 2021).

So, Miramar Hotel and Investment Company has an ROCE of 2.3%. Even though it's in line with the industry average of 2.3%, it's still a low return by itself.

View our latest analysis for Miramar Hotel and Investment Company

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Miramar Hotel and Investment Company has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Miramar Hotel and Investment Company's ROCE Trend?

In terms of Miramar Hotel and Investment Company's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.3% from 4.7% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On Miramar Hotel and Investment Company's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Miramar Hotel and Investment Company have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 11% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Miramar Hotel and Investment Company does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While Miramar Hotel and Investment Company 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.
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