Be Wary Of Byke Hospitality (NSE:BYKE) And Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think Byke Hospitality (NSE:BYKE) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Byke Hospitality:

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

0.027 = ₹59m ÷ (₹2.5b - ₹347m) (Based on the trailing twelve months to September 2022).

Therefore, Byke Hospitality has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 9.9%.

Check out our latest analysis for Byke Hospitality

Historical performance is a great place to start when researching a stock so above you can see the gauge for Byke Hospitality's ROCE against it's prior returns. If you'd like to look at how Byke Hospitality has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Byke Hospitality's ROCE Trending?

In terms of Byke Hospitality's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 29% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

While returns have fallen for Byke Hospitality in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. But since the stock has dived 74% in the last five years, there could be other drivers that are influencing the business' outlook. Therefore, we'd suggest researching the stock further to uncover more about the business.

If you'd like to know more about Byke Hospitality, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.