Regal Hotels International Holdings' (HKG:78) Returns On Capital Not Reflecting Well On The Business

What financial metrics can indicate to us that a company is maturing or even in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into Regal Hotels International Holdings (HKG:78), we weren't too upbeat about how things were going.

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 Regal Hotels International Holdings is:

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

0.0024 = HK$67m ÷ (HK$30b - HK$2.6b) (Based on the trailing twelve months to June 2022).

Therefore, Regal Hotels International Holdings has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 2.9%.

View our latest analysis for Regal Hotels International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Regal Hotels International Holdings' ROCE against it's prior returns. If you'd like to look at how Regal Hotels International Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Regal Hotels International Holdings Tell Us?

We are a bit worried about the trend of returns on capital at Regal Hotels International Holdings. Unfortunately the returns on capital have diminished from the 2.5% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Regal Hotels International Holdings becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Regal Hotels International Holdings is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 46% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing to note, we've identified 2 warning signs with Regal Hotels International Holdings and understanding them should be part of your investment process.

While Regal Hotels International Holdings 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.