Scandic Hotels Group (STO:SHOT) May Have Issues Allocating Its Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Scandic Hotels Group (STO:SHOT), it didn't seem to tick all of these boxes.

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. To calculate this metric for Scandic Hotels Group, this is the formula:

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

0.039 = kr1.7b ÷ (kr50b - kr6.2b) (Based on the trailing twelve months to June 2022).

Thus, Scandic Hotels Group has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 16%.

See our latest analysis for Scandic Hotels Group

In the above chart we have measured Scandic Hotels Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Scandic Hotels Group here for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Scandic Hotels Group doesn't inspire confidence. Around five years ago the returns on capital were 8.9%, but since then they've fallen to 3.9%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Scandic Hotels Group. These growth trends haven't led to growth returns though, since the stock has fallen 39% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

While Scandic Hotels Group doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

While Scandic Hotels Group 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.