What Do The Returns On Capital At Hotel Grand Central (SGX:H18) Tell Us?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after investigating Hotel Grand Central (SGX:H18), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

0.015 = S$23m ÷ (S$1.6b - S$46m) (Based on the trailing twelve months to June 2020).

So, Hotel Grand Central has an ROCE of 1.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 1.8%.

View our latest analysis for Hotel Grand Central

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

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

In terms of Hotel Grand Central's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.5% from 2.5% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Hotel Grand Central has decreased its current liabilities to 2.9% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Hotel Grand Central's ROCE

In summary, we're somewhat concerned by Hotel Grand Central's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 13% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know more about Hotel Grand Central, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.

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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