What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Asian Hotels (West) (NSE:AHLWEST) and its trend of ROCE, we really liked what we saw.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Asian Hotels (West) is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = ₹670m ÷ (₹12b - ₹1.1b) (Based on the trailing twelve months to June 2020).
Therefore, Asian Hotels (West) has an ROCE of 6.3%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 4.8%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Asian Hotels (West)'s ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Asian Hotels (West), check out these free graphs here.
The Trend Of ROCE
Asian Hotels (West) has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 402% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
Our Take On Asian Hotels (West)'s ROCE
To bring it all together, Asian Hotels (West) has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 131% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
On a final note, we found 2 warning signs for Asian Hotels (West) (1 is potentially serious) 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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