These Return Metrics Don't Make Grupo Posadas. de (BMV:POSADASA) Look Too Strong

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Grupo Posadas. de (BMV:POSADASA) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Grupo Posadas. de:

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

0.059 = Mex$797m ÷ (Mex$18b - Mex$4.5b) (Based on the trailing twelve months to September 2023).

So, Grupo Posadas. de has an ROCE of 5.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.2%.

View our latest analysis for Grupo Posadas. de

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

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Grupo Posadas. de. To be more specific, the ROCE was 14% 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. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Grupo Posadas. de to turn into a multi-bagger.

The Bottom Line On Grupo Posadas. de's ROCE

In summary, it's unfortunate that Grupo Posadas. de is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 33% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we've found 1 warning sign for Grupo Posadas. de that we think you should be aware of.

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.