Societatea Comerciala Compania Hoteliera Intercontinental Romania's (BVB:RCHI) Returns On Capital Tell Us There Is Reason To Feel Uneasy

When researching a stock for investment, what can tell us that the company is in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Societatea Comerciala Compania Hoteliera Intercontinental Romania (BVB:RCHI), we weren't too upbeat about how things were going.

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 Societatea Comerciala Compania Hoteliera Intercontinental Romania is:

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

0.02 = RON2.4m ÷ (RON126m - RON8.4m) (Based on the trailing twelve months to December 2023).

So, Societatea Comerciala Compania Hoteliera Intercontinental Romania has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 3.8%.

Check out our latest analysis for Societatea Comerciala Compania Hoteliera Intercontinental Romania

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

So How Is Societatea Comerciala Compania Hoteliera Intercontinental Romania's ROCE Trending?

We are a bit worried about the trend of returns on capital at Societatea Comerciala Compania Hoteliera Intercontinental Romania. Unfortunately the returns on capital have diminished from the 8.1% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Societatea Comerciala Compania Hoteliera Intercontinental Romania becoming one if things continue as they have.

What We Can Learn From Societatea Comerciala Compania Hoteliera Intercontinental Romania's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. And, the stock has remained flat over the last year, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Societatea Comerciala Compania Hoteliera Intercontinental Romania (including 2 which are concerning) .

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.