Hotel Holiday Garden (TWSE:2702) Might Be Having Difficulty Using Its Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Hotel Holiday Garden (TWSE:2702) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Hotel Holiday Garden, this is the formula:

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

0.01 = NT$71m ÷ (NT$8.6b - NT$1.5b) (Based on the trailing twelve months to March 2024).

So, Hotel Holiday Garden has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 8.8%.

See our latest analysis for Hotel Holiday Garden

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

So How Is Hotel Holiday Garden's ROCE Trending?

On the surface, the trend of ROCE at Hotel Holiday Garden doesn't inspire confidence. Around five years ago the returns on capital were 3.2%, but since then they've fallen to 1.0%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

To conclude, we've found that Hotel Holiday Garden is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 35% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you'd like to know more about Hotel Holiday Garden, we've spotted 4 warning signs, and 1 of them is potentially serious.

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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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.

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