Is Apollo Sindoori Hotels (NSE:APOLSINHOT) Likely To Turn Things Around?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Apollo Sindoori Hotels (NSE:APOLSINHOT), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Apollo Sindoori Hotels is:

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

0.028 = ₹32m ÷ (₹1.5b - ₹337m) (Based on the trailing twelve months to September 2020).

So, Apollo Sindoori Hotels has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 10%.

View our latest analysis for Apollo Sindoori Hotels

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'd like to look at how Apollo Sindoori Hotels has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Apollo Sindoori Hotels' ROCE Trend?

When we looked at the ROCE trend at Apollo Sindoori Hotels, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 2.8%. However it looks like Apollo Sindoori Hotels might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Apollo Sindoori Hotels has done well to pay down its current liabilities to 23% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

To conclude, we've found that Apollo Sindoori Hotels is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 311% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a separate note, we've found 2 warning signs for Apollo Sindoori Hotels you'll probably want to know about.

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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