Mandarin Oriental International's (SGX:M04) Returns On Capital Are Heading Higher

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Mandarin Oriental International's (SGX:M04) returns on capital, so let's have a look.

Understanding 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 Mandarin Oriental International is:

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

0.029 = US$96m ÷ (US$3.6b - US$175m) (Based on the trailing twelve months to June 2024).

Therefore, Mandarin Oriental International has an ROCE of 2.9%. Even though it's in line with the industry average of 3.4%, it's still a low return by itself.

See 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'd like to look at how Mandarin Oriental International has performed in the past in other metrics, you can view this free graph of Mandarin Oriental International's past earnings, revenue and cash flow.

What Can We Tell From Mandarin Oriental International's ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased by 73% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 32% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

The Bottom Line On Mandarin Oriental International's ROCE

In a nutshell, we're pleased to see that Mandarin Oriental International has been able to generate higher returns from less capital. Since the stock has only returned 6.1% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

On a separate note, we've found 1 warning sign for Mandarin Oriental International you'll probably want to know about.

While Mandarin Oriental International isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.