What Do The Returns On Capital At EIH Associated Hotels (NSE:EIHAHOTELS) Tell Us?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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.

Understanding 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)

0.023 = ₹79m ÷ (₹3.8b - ₹373m) (Based on the trailing twelve months to September 2020).

Thus, EIH Associated Hotels has an ROCE of 2.3%. On its own, that's a low figure but it's around the 2.6% average generated by the Hospitality industry.

View our latest analysis for EIH Associated Hotels

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?

When we looked at the ROCE trend at EIH Associated Hotels, we didn't gain much confidence. To be more specific, ROCE has fallen from 19% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, EIH Associated Hotels has decreased its current liabilities to 9.7% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From EIH Associated Hotels' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for EIH Associated Hotels have fallen, meanwhile the business is employing more capital than it was five years ago. Investors must expect better things on the horizon though because the stock has risen 3.1% 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for EIH Associated Hotels (of which 1 doesn't sit too well with us!) that you should know about.

While EIH Associated Hotels 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. 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.
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