Miramar Hotel and Investment Company (HKG:71) May Have Issues Allocating Its Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Miramar Hotel and Investment Company (HKG:71) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Miramar Hotel and Investment Company:

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

0.027 = HK$552m ÷ (HK$21b - HK$727m) (Based on the trailing twelve months to June 2022).

Therefore, Miramar Hotel and Investment Company has an ROCE of 2.7%. Even though it's in line with the industry average of 2.9%, it's still a low return by itself.

Our analysis indicates that 71 is potentially overvalued!

Historical performance is a great place to start when researching a stock so above you can see the gauge for Miramar Hotel and Investment Company's ROCE against it's prior returns. If you're interested in investigating Miramar Hotel and Investment Company's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Miramar Hotel and Investment Company Tell Us?

On the surface, the trend of ROCE at Miramar Hotel and Investment Company doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.7% from 4.9% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Miramar Hotel and Investment Company's ROCE

While returns have fallen for Miramar Hotel and Investment Company in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 19% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing to note, we've identified 1 warning sign with Miramar Hotel and Investment Company and understanding this should be part of your investment process.

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.