1957 (Hospitality) (HKG:8495) Will Be Hoping To Turn Its Returns On Capital Around

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at 1957 (Hospitality) (HKG:8495), we've spotted some signs that it could be struggling, so let's investigate.

Understanding 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 1957 (Hospitality), this is the formula:

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

0.018 = HK$1.9m ÷ (HK$222m - HK$115m) (Based on the trailing twelve months to March 2021).

Thus, 1957 (Hospitality) has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 2.6%.

See our latest analysis for 1957 (Hospitality)

Historical performance is a great place to start when researching a stock so above you can see the gauge for 1957 (Hospitality)'s ROCE against it's prior returns. If you're interested in investigating 1957 (Hospitality)'s past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For 1957 (Hospitality) Tell Us?

In terms of 1957 (Hospitality)'s historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 4.5%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 1957 (Hospitality) becoming one if things continue as they have.

On a side note, 1957 (Hospitality)'s current liabilities are still rather high at 52% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last three years have experienced a 55% 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.

If you want to continue researching 1957 (Hospitality), you might be interested to know about the 2 warning signs that our analysis has discovered.

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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