What Asian Hotels (North)'s (NSE:ASIANHOTNR) Returns On Capital Can Tell Us

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at Asian Hotels (North) (NSE:ASIANHOTNR), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Asian Hotels (North), this is the formula:

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

0.0095 = ₹158m ÷ (₹21b - ₹4.7b) (Based on the trailing twelve months to June 2020).

Therefore, Asian Hotels (North) has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 3.3%.

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

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Asian Hotels (North). About five years ago, returns on capital were 1.5%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Asian Hotels (North) becoming one if things continue as they have.

The Bottom Line On Asian Hotels (North)'s ROCE

In summary, it's unfortunate that Asian Hotels (North) is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 59% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Asian Hotels (North) we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.

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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