Asian Hotels (East)'s (NSE:AHLEAST) Returns On Capital Are Heading Higher

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Asian Hotels (East) (NSE:AHLEAST) looks quite promising in regards to its trends of return on capital.

Understanding 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 Asian Hotels (East), this is the formula:

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

0.032 = ₹65m ÷ (₹2.3b - ₹251m) (Based on the trailing twelve months to September 2022).

Thus, Asian Hotels (East) has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 9.9%.

View our latest analysis for Asian Hotels (East)

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

So How Is Asian Hotels (East)'s ROCE Trending?

While the ROCE is still rather low for Asian Hotels (East), we're glad to see it heading in the right direction. The data shows that returns on capital have increased by 141% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Asian Hotels (East) appears to been achieving more with less, since the business is using 77% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

The Bottom Line On Asian Hotels (East)'s ROCE

In summary, it's great to see that Asian Hotels (East) has been able to turn things around and earn higher returns on lower amounts of capital. Given the stock has declined 40% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

Asian Hotels (East) does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should 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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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.