Lemon Tree Hotels (NSE:LEMONTREE) Has More To Do To Multiply In Value Going Forward

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Lemon Tree Hotels (NSE:LEMONTREE) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Lemon Tree Hotels is:

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

0.035 = ₹1.2b ÷ (₹36b - ₹2.5b) (Based on the trailing twelve months to June 2022).

Thus, Lemon Tree Hotels has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 5.2%.

Check out our latest analysis for Lemon Tree Hotels

In the above chart we have measured Lemon Tree Hotels' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Lemon Tree Hotels here for free.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Lemon Tree Hotels in recent years. The company has consistently earned 3.5% for the last five years, and the capital employed within the business has risen 73% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

Long story short, while Lemon Tree Hotels has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 37% over the last three years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you're still interested in Lemon Tree Hotels it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Lemon Tree Hotels may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.