To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Hotel Royal Chihpen's (GTSM:5704) returns on capital, so let's have a look.
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 Hotel Royal Chihpen, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = NT$71m ÷ (NT$636m - NT$116m) (Based on the trailing twelve months to September 2020).
Therefore, Hotel Royal Chihpen has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 5.6% generated by the Hospitality industry.
See our latest analysis for Hotel Royal Chihpen
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hotel Royal Chihpen's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Hotel Royal Chihpen, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
Hotel Royal Chihpen has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 33% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
Our Take On Hotel Royal Chihpen's ROCE
As discussed above, Hotel Royal Chihpen appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Hotel Royal Chihpen does have some risks though, and we've spotted 2 warning signs for Hotel Royal Chihpen that you might be interested in.
While Hotel Royal Chihpen 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.
If you decide to trade Hotel Royal Chihpen, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted
Valuation is complex, but we're here to simplify it.
Discover if Hotel Royal Chihpen might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
Access Free AnalysisThis 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
About TPEX:5704
Flawless balance sheet second-rate dividend payer.