Shangri-La Hotels (Malaysia) Berhad (KLSE:SHANG) Is Finding It Tricky To Allocate Its Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Shangri-La Hotels (Malaysia) Berhad (KLSE:SHANG), the trends above didn't look too great.

What Is 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. To calculate this metric for Shangri-La Hotels (Malaysia) Berhad, this is the formula:

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

0.033 = RM31m ÷ (RM1.2b - RM290m) (Based on the trailing twelve months to March 2023).

So, Shangri-La Hotels (Malaysia) Berhad has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 5.8%.

View our latest analysis for Shangri-La Hotels (Malaysia) Berhad

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

What The Trend Of ROCE Can Tell Us

The trend of returns that Shangri-La Hotels (Malaysia) Berhad is generating are raising some concerns. The company used to generate 10% on its capital five years ago but it has since fallen noticeably. What's equally concerning is that the amount of capital deployed in the business has shrunk by 25% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

The Key Takeaway

In summary, it's unfortunate that Shangri-La Hotels (Malaysia) Berhad is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 56% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know about the risks facing Shangri-La Hotels (Malaysia) Berhad, we've discovered 1 warning sign that 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.