When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at Hotel Grand Central (SGX:H18), so let's see why.
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 Hotel Grand Central:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.013 = S$19m ÷ (S$1.5b - S$43m) (Based on the trailing twelve months to June 2022).
Therefore, Hotel Grand Central has an ROCE of 1.3%. Even though it's in line with the industry average of 1.0%, it's still a low return by itself.
Check out our latest analysis for Hotel Grand Central
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hotel Grand Central's ROCE against it's prior returns. If you'd like to look at how Hotel Grand Central 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 Hotel Grand Central's ROCE Trend?
We are a bit worried about the trend of returns on capital at Hotel Grand Central. To be more specific, the ROCE was 2.2% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Hotel Grand Central becoming one if things continue as they have.
Our Take On Hotel Grand Central's 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. It should come as no surprise then that the stock has fallen 26% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
Hotel Grand Central does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...
While Hotel Grand Central 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.
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