Here's What's Concerning About Hoteles City Express. de's (BMV:HCITY) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Hoteles City Express. de (BMV:HCITY) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Hoteles City Express. de:

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

0.014 = Mex$192m ÷ (Mex$14b - Mex$781m) (Based on the trailing twelve months to June 2022).

Therefore, Hoteles City Express. de has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 3.1%.

View our latest analysis for Hoteles City Express. de

In the above chart we have measured Hoteles City Express. de's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hoteles City Express. de here for free.

How Are Returns Trending?

In terms of Hoteles City Express. de's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.4% from 4.0% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Hoteles City Express. de is reinvesting for growth and has higher sales as a result. But since the stock has dived 81% in the last five years, there could be other drivers that are influencing the business' outlook. Therefore, we'd suggest researching the stock further to uncover more about the business.

If you'd like to know about the risks facing Hoteles City Express. de, 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.