Miramar Hotel and Investment Company's (HKG:71) Returns On Capital Not Reflecting Well On The Business

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. 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.

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. 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)

0.025 = HK$513m ÷ (HK$21b - HK$515m) (Based on the trailing twelve months to December 2020).

Thus, Miramar Hotel and Investment Company has an ROCE of 2.5%. On its own, that's a low figure but it's around the 3.1% average generated by the Hospitality industry.

See 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 want to delve into the historical earnings, revenue and cash flow of Miramar Hotel and Investment Company, check out these free graphs here.

So How Is Miramar Hotel and Investment Company's ROCE Trending?

When we looked at the ROCE trend at Miramar Hotel and Investment Company, we didn't gain much confidence. To be more specific, ROCE has fallen from 5.2% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Miramar Hotel and Investment Company's ROCE

In summary, we're somewhat concerned by Miramar Hotel and Investment Company's diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 29% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a final note, we found 3 warning signs for Miramar Hotel and Investment Company (1 doesn't sit too well with us) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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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