Norwegian Cruise Line Holdings' (NYSE:NCLH) Returns On Capital Tell Us There Is Reason To Feel Uneasy

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Norwegian Cruise Line Holdings (NYSE:NCLH), the trends above didn't look too great.

Understanding 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. Analysts use this formula to calculate it for Norwegian Cruise Line Holdings:

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

0.038 = US$525m ÷ (US$19b - US$5.4b) (Based on the trailing twelve months to September 2023).

So, Norwegian Cruise Line Holdings has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 9.6%.

View our latest analysis for Norwegian Cruise Line Holdings

Above you can see how the current ROCE for Norwegian Cruise Line Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Norwegian Cruise Line Holdings.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Norwegian Cruise Line Holdings. Unfortunately the returns on capital have diminished from the 9.7% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Norwegian Cruise Line Holdings to turn into a multi-bagger.

What We Can Learn From Norwegian Cruise Line Holdings' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 69% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you're still interested in Norwegian Cruise Line Holdings it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Norwegian Cruise Line Holdings 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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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.