Asian Hotels (North) (NSE:ASIANHOTNR) Is Looking To Continue Growing Its Returns On Capital

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Asian Hotels (North)'s (NSE:ASIANHOTNR) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Asian Hotels (North) is:

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

0.046 = ₹441m ÷ (₹16b - ₹6.1b) (Based on the trailing twelve months to June 2023).

Thus, Asian Hotels (North) has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 11%.

See our latest analysis for Asian Hotels (North)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Asian Hotels (North)'s ROCE against it's prior returns. 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 past earnings, revenue and cash flow.

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

It's nice to see that ROCE is headed in the right direction, even if it is still relatively low. The data shows that returns on capital have increased by 28% over the trailing five years. The company is now earning ₹0.05 per dollar of capital employed. In regards to capital employed, Asian Hotels (North) appears to been achieving more with less, since the business is using 46% less capital to run its operation. 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.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 39% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line

In a nutshell, we're pleased to see that Asian Hotels (North) has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 37% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know more about Asian Hotels (North), we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

While Asian Hotels (North) may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.