Returns At Impiana Hotels Berhad (KLSE:IMPIANA) Appear To Be Weighed Down

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. 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 Impiana Hotels Berhad (KLSE:IMPIANA) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Impiana Hotels Berhad:

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

0.013 = RM1.6m ÷ (RM202m - RM85m) (Based on the trailing twelve months to September 2021).

So, Impiana Hotels Berhad has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.3%.

Check out our latest analysis for Impiana Hotels Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Impiana Hotels Berhad's ROCE against it's prior returns. If you're interested in investigating Impiana Hotels Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Over the past two years, Impiana Hotels Berhad's ROCE has remained relatively flat while the business is using 78% less capital than before. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. In addition to that, since the ROCE doesn't scream "quality" at 1.3%, it's hard to get excited about these developments.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last two years. This is intriguing because if current liabilities hadn't increased to 42% of total assets, this reported ROCE would probably be less than1.3% because total capital employed would be higher.The 1.3% ROCE could be even lower if current liabilities weren't 42% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

What We Can Learn From Impiana Hotels Berhad's ROCE

In summary, Impiana Hotels Berhad isn't reinvesting funds back into the business and returns aren't growing.

One more thing, we've spotted 2 warning signs facing Impiana Hotels Berhad that you might find interesting.

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.