We're Watching These Trends At Miramar Hotel and Investment Company (HKG:71)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Miramar Hotel and Investment Company (HKG:71) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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)

0.037 = HK$760m ÷ (HK$21b - HK$859m) (Based on the trailing twelve months to June 2020).

So, Miramar Hotel and Investment Company has an ROCE of 3.7%. Even though it's in line with the industry average of 3.5%, it's still a low return by itself.

Check out 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.

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

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 5.5% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

The Key Takeaway

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 16% 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.

If you want to know some of the risks facing Miramar Hotel and Investment Company we've found 2 warning signs (1 can't be ignored!) that you should be aware of before investing here.

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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