What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Asian Hotels (East) (NSE:AHLEAST) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. The formula for this calculation on Asian Hotels (East) is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.013 = ₹112m ÷ (₹9.7b - ₹997m) (Based on the trailing twelve months to March 2020).
Thus, Asian Hotels (East) has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 2.5%.
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?
Over the past five years, Asian Hotels (East)'s ROCE has remained relatively flat while the business is using 22% less capital than before. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.
The Key Takeaway
In summary, Asian Hotels (East) isn't reinvesting funds back into the business and returns aren't growing. And investors may be recognizing these trends since the stock has only returned a total of 7.5% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
Like most companies, Asian Hotels (East) does come with some risks, and we've found 1 warning sign that you should be aware of.
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. 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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About NSEI:AHLEAST
Moderate average dividend payer.
