Return Trends At Dalata Hotel Group (ISE:DHG) Aren't Appealing

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. In light of that, when we looked at Dalata Hotel Group (ISE:DHG) and its ROCE trend, we weren't exactly thrilled.

What Is 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. To calculate this metric for Dalata Hotel Group, this is the formula:

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

0.067 = €158m ÷ (€2.5b - €116m) (Based on the trailing twelve months to June 2023).

Therefore, Dalata Hotel Group has an ROCE of 6.7%. Even though it's in line with the industry average of 7.2%, it's still a low return by itself.

View our latest analysis for Dalata Hotel Group

In the above chart we have measured Dalata Hotel Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Dalata Hotel Group.

What Does the ROCE Trend For Dalata Hotel Group Tell Us?

In terms of Dalata Hotel Group's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 6.7% for the last five years, and the capital employed within the business has risen 105% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On Dalata Hotel Group's ROCE

As we've seen above, Dalata Hotel Group's returns on capital haven't increased but it is reinvesting in the business. And in the last five years, the stock has given away 14% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing, we've spotted 1 warning sign facing Dalata Hotel Group that you might find interesting.

While Dalata Hotel Group 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.