The Returns On Capital At Apollo Sindoori Hotels (NSE:APOLSINHOT) Don't Inspire Confidence

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Apollo Sindoori Hotels (NSE:APOLSINHOT), we don't think it's current trends fit the mold of a multi-bagger.

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

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

0.026 = ₹30m ÷ (₹1.5b - ₹367m) (Based on the trailing twelve months to June 2021).

Thus, Apollo Sindoori Hotels has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 8.0%.

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

What The Trend Of ROCE Can Tell Us

In terms of Apollo Sindoori Hotels' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.6% from 26% five years ago. 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 related note, Apollo Sindoori Hotels has decreased its current liabilities to 24% of total assets. So we could link some of this to the decrease in ROCE. 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

Bringing it all together, while we're somewhat encouraged by Apollo Sindoori Hotels' reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 481% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Apollo Sindoori Hotels does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Apollo Sindoori Hotels 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.
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