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

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Societatea Comerciala Compania Hoteliera Intercontinental Romania (BVB:RCHI) we aren't filled with optimism, but let's investigate further.

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What Is 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. 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).

Therefore, Societatea Comerciala Compania Hoteliera Intercontinental Romania has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 2.9%.

See our latest analysis for Societatea Comerciala Compania Hoteliera Intercontinental Romania

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'd like to look at how Societatea Comerciala Compania Hoteliera Intercontinental Romania has performed in the past in other metrics, you can view this free graph of Societatea Comerciala Compania Hoteliera Intercontinental Romania's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Societatea Comerciala Compania Hoteliera Intercontinental Romania's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 8.1% that they were earning five years ago. 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. 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.

The Bottom Line On 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. Investors haven't taken kindly to these developments, since the stock has declined 11% from where it was year ago. With underlying trends that aren't great in these areas, 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 1 which shouldn't be ignored) .

While Societatea Comerciala Compania Hoteliera Intercontinental Romania may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.