Capital Allocation Trends At Hotel Grand Central (SGX:H18) Aren't Ideal

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at Hotel Grand Central (SGX:H18), so let's see why.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Hotel Grand Central is:

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

0.0083 = S$12m ÷ (S$1.5b - S$48m) (Based on the trailing twelve months to December 2020).

Therefore, Hotel Grand Central has an ROCE of 0.8%. Even though it's in line with the industry average of 0.9%, it's still a low return by itself.

View our latest analysis for Hotel Grand Central

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 Hotel Grand Central has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Hotel Grand Central's ROCE Trend?

We are a bit worried about the trend of returns on capital at Hotel Grand Central. To be more specific, the ROCE was 1.4% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Hotel Grand Central to turn into a multi-bagger.

The Bottom Line On Hotel Grand Central's ROCE

In summary, it's unfortunate that Hotel Grand Central is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 6.6% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Hotel Grand Central (including 1 which is concerning) .

While Hotel Grand Central 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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This article by Simply Wall St is general in nature. 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.
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