Stock Analysis

Will The ROCE Trend At Hotel Royal Chihpen (GTSM:5704) Continue?

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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

GTSM:5704 Return on Capital Employed February 17th 2021

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.

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About TPEX:5704

Hotel Royal Chihpen

Hotel Royal Chihpen engages in the hotel business in Taiwan.

Flawless balance sheet with proven track record and pays a dividend.

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