Stock Analysis

The Returns On Capital At EIH Associated Hotels (NSE:EIHAHOTELS) Don't Inspire Confidence

NSEI:EIHAHOTELS
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When researching a stock for investment, what can tell us that the company is in decline? 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into EIH Associated Hotels (NSE:EIHAHOTELS), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for EIH Associated Hotels:

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

0.033 = ₹109m ÷ (₹3.8b - ₹436m) (Based on the trailing twelve months to December 2021).

Thus, EIH Associated Hotels has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 5.1%.

See our latest analysis for EIH Associated Hotels

roce
NSEI:EIHAHOTELS Return on Capital Employed March 29th 2022

Historical performance is a great place to start when researching a stock so above you can see the gauge for EIH Associated Hotels' ROCE against it's prior returns. If you'd like to look at how EIH Associated Hotels 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?

There is reason to be cautious about EIH Associated Hotels, given the returns are trending downwards. To be more specific, the ROCE was 23% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on EIH Associated Hotels becoming one if things continue as they have.

The Bottom Line On EIH Associated Hotels' ROCE

In summary, it's unfortunate that EIH Associated Hotels is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 39% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a final note, we found 3 warning signs for EIH Associated Hotels (1 makes us a bit uncomfortable) 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.