Regal Hotels International Holdings (HKG:78) Will Be Hoping To Turn Its Returns On Capital Around

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Regal Hotels International Holdings (HKG:78) we aren't filled with optimism, but let's investigate further.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Regal Hotels International Holdings, this is the formula:

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

0.00071 = HK$16m ÷ (HK$30b - HK$7.8b) (Based on the trailing twelve months to December 2022).

So, Regal Hotels International Holdings has an ROCE of 0.07%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 3.0%.

Check out 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 want to delve into the historical earnings, revenue and cash flow of Regal Hotels International Holdings, check out these free graphs here.

What Can We Tell From Regal Hotels International Holdings' ROCE Trend?

We are a bit worried about the trend of returns on capital at Regal Hotels International Holdings. To be more specific, the ROCE was 3.2% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. 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.

On a side note, Regal Hotels International Holdings' current liabilities have increased over the last five years to 26% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 0.07%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From Regal Hotels International Holdings' ROCE

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 23% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we've found 2 warning signs for Regal Hotels International Holdings that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.