Millennium & Copthorne Hotels New Zealand (NZSE:MCK) Is Reinvesting At Lower Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Millennium & Copthorne Hotels New Zealand (NZSE:MCK) and its ROCE trend, we weren't exactly thrilled.

What is 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 Millennium & Copthorne Hotels New Zealand is:

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

0.052 = NZ$50m ÷ (NZ$988m - NZ$33m) (Based on the trailing twelve months to December 2020).

So, Millennium & Copthorne Hotels New Zealand has an ROCE of 5.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.5%.

Check out our latest analysis for Millennium & Copthorne Hotels New Zealand

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Millennium & Copthorne Hotels New Zealand, check out these free graphs here.

What Does the ROCE Trend For Millennium & Copthorne Hotels New Zealand Tell Us?

In terms of Millennium & Copthorne Hotels New Zealand's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.2% from 7.1% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From Millennium & Copthorne Hotels New Zealand's ROCE

In summary, we're somewhat concerned by Millennium & Copthorne Hotels New Zealand's diminishing returns on increasing amounts of capital. However the stock has delivered a 55% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you're still interested in Millennium & Copthorne Hotels New Zealand it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Millennium & Copthorne Hotels New Zealand isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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