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What financial metrics can indicate to us that a company is maturing or even in decline? 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 combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Hotel Grand Central (SGX:H18), we weren't too hopeful.
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. The formula for this calculation on Hotel Grand Central is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.016 = S$23m ÷ (S$1.6b - S$81m) (Based on the trailing twelve months to December 2023).
Therefore, Hotel Grand Central has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 4.5%.
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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hotel Grand Central.
What The Trend Of ROCE Can Tell Us
There is reason to be cautious about Hotel Grand Central, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 2.3% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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.
The Bottom Line On Hotel Grand Central's ROCE
In summary, it's unfortunate that Hotel Grand Central is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 35% from where it was five years ago. 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 3 warning signs in our investment analysis, and 2 of those are significant...