Country Club Hospitality & Holidays (NSE:CCHHL) Might Have The Makings Of A Multi-Bagger

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, we've noticed some promising trends at Country Club Hospitality & Holidays (NSE:CCHHL) so let's look a bit deeper.

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. To calculate this metric for Country Club Hospitality & Holidays, this is the formula:

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

0.039 = ₹197m ÷ (₹6.6b - ₹1.5b) (Based on the trailing twelve months to September 2023).

So, Country Club Hospitality & Holidays has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 11%.

Check out our latest analysis for Country Club Hospitality & Holidays

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

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased by 5,572% 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 65% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Country Club Hospitality & Holidays 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. The current liabilities has increased to 23% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Key Takeaway

From what we've seen above, Country Club Hospitality & Holidays has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has returned a staggering 149% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Country Club Hospitality & Holidays can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 2 warning signs we've spotted with Country Club Hospitality & Holidays (including 1 which is concerning) .

While Country Club Hospitality & Holidays 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.