Returns On Capital At Formosa International Hotels (TPE:2707) Paint An Interesting Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Formosa International Hotels (TPE:2707) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Formosa International Hotels, this is the formula:

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

0.11 = NT$814m ÷ (NT$11b - NT$3.5b) (Based on the trailing twelve months to September 2020).

Thus, Formosa International Hotels has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 5.6% it's much better.

See our latest analysis for Formosa International Hotels

Historical performance is a great place to start when researching a stock so above you can see the gauge for Formosa International Hotels' ROCE against it's prior returns. If you'd like to look at how Formosa International Hotels has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Formosa International Hotels' ROCE Trending?

When we looked at the ROCE trend at Formosa International Hotels, we didn't gain much confidence. To be more specific, ROCE has fallen from 26% over the last five years. 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.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Formosa International Hotels have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last five years have experienced a 21% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a separate note, we've found 3 warning signs for Formosa International Hotels you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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