Mandarin Oriental International (SGX:M04) Is Reinvesting At Lower Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Mandarin Oriental International (SGX:M04) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. Analysts use this formula to calculate it for Mandarin Oriental International:

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

0.033 = US$102m ÷ (US$3.7b - US$625m) (Based on the trailing twelve months to December 2023).

Thus, Mandarin Oriental International has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 4.6%.

View our latest analysis for Mandarin Oriental International

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mandarin Oriental International'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 Mandarin Oriental International.

What The Trend Of ROCE Can Tell Us

In terms of Mandarin Oriental International's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 6.3%, but since then they've fallen to 3.3%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Mandarin Oriental International has done well to pay down its current liabilities to 17% of total assets. So we could link some of this to the decrease in ROCE. 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.

Our Take On Mandarin Oriental International's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Mandarin Oriental International. These trends are starting to be recognized by investors since the stock has delivered a 8.2% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you'd like to know more about Mandarin Oriental International, we've spotted 2 warning signs, and 1 of them can't be ignored.

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.

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