Will Lemon Tree Hotels' (NSE:LEMONTREE) Growth In ROCE Persist?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Speaking of which, we noticed some great changes in Lemon Tree Hotels' (NSE:LEMONTREE) returns on capital, so let's have a 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. To calculate this metric for Lemon Tree Hotels, this is the formula:

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

0.029 = ₹1.0b ÷ (₹38b - ₹3.0b) (Based on the trailing twelve months to June 2020).

Thus, Lemon Tree Hotels has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 4.8%.

View our latest analysis for Lemon Tree Hotels

Above you can see how the current ROCE for Lemon Tree Hotels compares to its prior returns on capital, but there's only so much you can tell from the past. 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

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 2.9%. The amount of capital employed has increased too, by 100%. So we're very much inspired by what we're seeing at Lemon Tree Hotels thanks to its ability to profitably reinvest capital.

Our Take On Lemon Tree Hotels' ROCE

In summary, it's great to see that Lemon Tree Hotels can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Given the stock has declined 53% in the last year, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know about the risks facing Lemon Tree Hotels, we've discovered 1 warning sign that you should be aware of.

While Lemon Tree 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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