Returns On Capital Are Showing Encouraging Signs At Asian Hotels (East) (NSE:AHLEAST)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 when we looked at Asian Hotels (East) (NSE:AHLEAST) and its trend of ROCE, we really liked what we saw.

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 Asian Hotels (East) is:

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

0.14 = ₹549m ÷ (₹6.0b - ₹2.1b) (Based on the trailing twelve months to March 2024).

Therefore, Asian Hotels (East) has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 8.9% it's much better.

View our latest analysis for Asian Hotels (East)

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're interested in investigating Asian Hotels (East)'s past further, check out this free graph covering Asian Hotels (East)'s past earnings, revenue and cash flow.

What Does the ROCE Trend For Asian Hotels (East) Tell Us?

Asian Hotels (East) has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 354%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 56% less capital than it was five years ago. Asian Hotels (East) may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 35% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From Asian Hotels (East)'s ROCE

From what we've seen above, Asian Hotels (East) has managed to increase it's returns on capital all the while reducing it's capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 16% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Asian Hotels (East) (of which 2 can't be ignored!) that you should know about.

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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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com