If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. 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)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)
0.018 = S$27m ÷ (S$1.6b - S$47m) (Based on the trailing twelve months to December 2022).
So, Hotel Grand Central has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 3.1%.
View 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're interested in investigating Hotel Grand Central's past further, check out 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. About five years ago, returns on capital were 2.7%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Hotel Grand Central to turn into a multi-bagger.
The Bottom Line 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 33% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.