How Has TAJGVK Hotels & Resorts (NSE:TAJGVK) Allocated Its Capital?

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at TAJGVK Hotels & Resorts (NSE:TAJGVK), we've spotted some signs that it could be struggling, so let's investigate.

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. Analysts use this formula to calculate it for TAJGVK Hotels & Resorts:

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

0.013 = ₹78m ÷ (₹7.2b - ₹1.2b) (Based on the trailing twelve months to September 2020).

So, TAJGVK Hotels & Resorts has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 2.6%.

View our latest analysis for TAJGVK Hotels & Resorts

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating TAJGVK Hotels & Resorts' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From TAJGVK Hotels & Resorts' ROCE Trend?

There is reason to be cautious about TAJGVK Hotels & Resorts, given the returns are trending downwards. To be more specific, the ROCE was 5.1% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect TAJGVK Hotels & Resorts to turn into a multi-bagger.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. However the stock has delivered a 59% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Like most companies, TAJGVK Hotels & Resorts does come with some risks, and we've found 1 warning sign that you should be aware of.

While TAJGVK Hotels & Resorts 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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