Returns At AGORA Hospitality Group (TSE:9704) Are On The Way Up

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Speaking of which, we noticed some great changes in AGORA Hospitality Group's (TSE:9704) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for AGORA Hospitality Group:

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

0.0079 = JP¥109m ÷ (JP¥20b - JP¥6.1b) (Based on the trailing twelve months to March 2024).

Therefore, AGORA Hospitality Group has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 9.6%.

See our latest analysis for AGORA Hospitality Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for AGORA Hospitality Group's ROCE against it's prior returns. If you'd like to look at how AGORA Hospitality Group has performed in the past in other metrics, you can view this free graph of AGORA Hospitality Group's past earnings, revenue and cash flow.

So How Is AGORA Hospitality Group's ROCE Trending?

While there are companies with higher returns on capital out there, we still find the trend at AGORA Hospitality Group promising. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 578% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 31% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line

In summary, we're delighted to see that AGORA Hospitality Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital.

If you'd like to know more about AGORA Hospitality Group, we've spotted 3 warning signs, and 2 of them are a bit unpleasant.

While AGORA Hospitality Group 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. 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.

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