Returns On Capital Are Showing Encouraging Signs At AGORA Hospitality Group (TSE:9704)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in AGORA Hospitality Group's (TSE:9704) returns on capital, so let's have a look.

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What Is 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. The formula for this calculation on AGORA Hospitality Group is:

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

0.02 = JP¥315m ÷ (JP¥20b - JP¥5.0b) (Based on the trailing twelve months to March 2025).

Therefore, AGORA Hospitality Group has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 9.9%.

View our latest analysis for AGORA Hospitality Group

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 AGORA Hospitality Group's past further, check out this free graph covering AGORA Hospitality Group's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're delighted to see that AGORA Hospitality Group is reaping rewards from its investments and has now broken into profitability. The company now earns 2.0% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by AGORA Hospitality Group has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 24% of its operations, which isn't ideal. 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.

In Conclusion...

As discussed above, AGORA Hospitality Group appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 116% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

AGORA Hospitality Group does have some risks though, and we've spotted 2 warning signs for AGORA Hospitality Group that you might be interested in.

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.