We're Watching These Trends At FDC International Hotels (TPE:2748)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at FDC International Hotels (TPE:2748) and its ROCE trend, we weren't exactly thrilled.

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 FDC International Hotels, this is the formula:

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

0.026 = NT$92m ÷ (NT$4.2b - NT$711m) (Based on the trailing twelve months to September 2020).

Therefore, FDC International Hotels has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 5.6%.

See our latest analysis for FDC International Hotels

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how FDC International Hotels has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From FDC International Hotels' ROCE Trend?

On the surface, the trend of ROCE at FDC International Hotels doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.6% from 14% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On FDC International Hotels' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for FDC International Hotels have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 19% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for FDC International Hotels (of which 2 don't sit too well with us!) that you should know about.

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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