Asian Hotels (North) (NSE:ASIANHOTNR) Is Experiencing Growth In Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So on that note, Asian Hotels (North) (NSE:ASIANHOTNR) looks quite promising in regards to its trends of return on capital.

Understanding 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. Analysts use this formula to calculate it for Asian Hotels (North):

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

0.067 = ₹529m ÷ (₹17b - ₹9.2b) (Based on the trailing twelve months to June 2024).

So, Asian Hotels (North) has an ROCE of 6.7%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 10%.

View our latest analysis for Asian Hotels (North)

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'd like to look at how Asian Hotels (North) has performed in the past in other metrics, you can view this free graph of Asian Hotels (North)'s past earnings, revenue and cash flow.

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

We're pretty happy with how the ROCE has been trending at Asian Hotels (North). The data shows that returns on capital have increased by 95% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 55% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Asian Hotels (North) 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. The current liabilities has increased to 54% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

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

In summary, it's great to see that Asian Hotels (North) has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has returned a solid 91% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a separate note, we've found 1 warning sign for Asian Hotels (North) you'll probably want to know about.

While Asian Hotels (North) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.