Stock Analysis

International Hotel Investments' (MTSE:IHI) Returns On Capital Not Reflecting Well On The Business

MTSE:IHI
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What financial metrics can indicate to us that a company is maturing or even in decline? 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 indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into International Hotel Investments (MTSE:IHI), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for International Hotel Investments, this is the formula:

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

0.0097 = €16m ÷ (€1.7b - €115m) (Based on the trailing twelve months to June 2022).

So, International Hotel Investments has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 6.0%.

View our latest analysis for International Hotel Investments

roce
MTSE:IHI Return on Capital Employed March 23rd 2023

Historical performance is a great place to start when researching a stock so above you can see the gauge for International Hotel Investments' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of International Hotel Investments, check out these free graphs here.

The Trend Of ROCE

In terms of International Hotel Investments' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 1.4% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on International Hotel Investments becoming one if things continue as they have.

The Key Takeaway

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. It should come as no surprise then that the stock has fallen 12% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

International Hotel Investments does have some risks, we noticed 3 warning signs (and 2 which are significant) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Valuation is complex, but we're helping make it simple.

Find out whether International Hotel Investments is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.