Stock Analysis

International Hotel Investments (MTSE:IHI) Will Be Hoping To Turn Its Returns On Capital Around

MTSE:IHI
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What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. 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 International Hotel Investments (MTSE:IHI), we've spotted some signs that it could be struggling, so let's investigate.

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. The formula for this calculation on International Hotel Investments is:

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

0.018 = €24m ÷ (€1.7b - €358m) (Based on the trailing twelve months to June 2023).

So, International Hotel Investments has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 7.2%.

See our latest analysis for International Hotel Investments

roce
MTSE:IHI Return on Capital Employed February 29th 2024

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're interested in investigating International Hotel Investments' past further, check out this free graph covering International Hotel Investments' past earnings, revenue and cash flow.

What Can We Tell From International Hotel Investments' ROCE Trend?

We are a bit worried about the trend of returns on capital at International Hotel Investments. About five years ago, returns on capital were 2.3%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect International Hotel Investments to turn into a multi-bagger.

On a side note, International Hotel Investments' current liabilities have increased over the last five years to 21% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 1.8%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

In Conclusion...

In summary, it's unfortunate that International Hotel Investments is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 28% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

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

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.

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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.