In This Article:
Today we are going to look at Apollo Sindoori Hotels Limited (NSE:APOLSINHOT) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Apollo Sindoori Hotels:
0.15 = ₹111m ÷ (₹1.0b - ₹275m) (Based on the trailing twelve months to June 2019.)
So, Apollo Sindoori Hotels has an ROCE of 15%.
See our latest analysis for Apollo Sindoori Hotels
Does Apollo Sindoori Hotels Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. It appears that Apollo Sindoori Hotels's ROCE is fairly close to the Commercial Services industry average of 13%. Setting aside the industry comparison for now, Apollo Sindoori Hotels's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
We can see that , Apollo Sindoori Hotels currently has an ROCE of 15%, less than the 26% it reported 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Apollo Sindoori Hotels's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. How cyclical is Apollo Sindoori Hotels? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.