Stock Analysis

EIH Associated Hotels (NSE:EIHAHOTELS) Will Be Hoping To Turn Its Returns On Capital Around

NSEI:EIHAHOTELS
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What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at EIH Associated Hotels (NSE:EIHAHOTELS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on EIH Associated Hotels is:

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

0.047 = ₹173m ÷ (₹4.1b - ₹469m) (Based on the trailing twelve months to March 2022).

Therefore, EIH Associated Hotels has an ROCE of 4.7%. Even though it's in line with the industry average of 5.0%, it's still a low return by itself.

View our latest analysis for EIH Associated Hotels

roce
NSEI:EIHAHOTELS Return on Capital Employed July 12th 2022

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating EIH Associated Hotels' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is EIH Associated Hotels' ROCE Trending?

On the surface, the trend of ROCE at EIH Associated Hotels doesn't inspire confidence. To be more specific, ROCE has fallen from 22% 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

In summary, despite lower returns in the short term, we're encouraged to see that EIH Associated Hotels is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 23% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

On a final note, we've found 1 warning sign for EIH Associated Hotels 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.

Valuation is complex, but we're helping make it simple.

Find out whether EIH Associated Hotels is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.