Investors Will Want Byke Hospitality's (NSE:BYKE) Growth In ROCE To Persist

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Byke Hospitality (NSE:BYKE) and its trend of ROCE, we really liked what we saw.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Byke Hospitality, this is the formula:

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

0.033 = ₹95m ÷ (₹3.0b - ₹186m) (Based on the trailing twelve months to September 2024).

Thus, Byke Hospitality has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 9.4%.

See 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're interested in investigating Byke Hospitality's past further, check out this free graph covering Byke Hospitality's past earnings, revenue and cash flow.

The Trend Of ROCE

The fact that Byke Hospitality is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 3.3% on its capital. And unsurprisingly, like most companies trying to break into the black, Byke Hospitality is utilizing 24% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Bottom Line

Overall, Byke Hospitality gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we've found 2 warning signs for Byke Hospitality that we think you should be aware of.

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.