Returns On Capital At Lemon Tree Hotels (NSE:LEMONTREE) Paint A Concerning Picture

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Lemon Tree Hotels (NSE:LEMONTREE), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Lemon Tree Hotels is:

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

0.0064 = ₹229m ÷ (₹37b - ₹1.2b) (Based on the trailing twelve months to December 2021).

Thus, Lemon Tree Hotels has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 5.1%.

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 to see what analysts are forecasting going forward, you should check out our free report for Lemon Tree Hotels.

What Can We Tell From Lemon Tree Hotels' ROCE Trend?

In terms of Lemon Tree Hotels' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.6% from 3.3% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Lemon Tree Hotels' ROCE

While returns have fallen for Lemon Tree Hotels in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 24% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing to note, we've identified 1 warning sign with Lemon Tree Hotels and understanding it should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.