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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Hotel Royal (SGX:H12) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Hotel Royal is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.014 = S$12m ÷ (S$857m - S$18m) (Based on the trailing twelve months to June 2024).
So, Hotel Royal has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 3.7%.
Check out our latest analysis for Hotel Royal
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hotel Royal.
What Can We Tell From Hotel Royal's ROCE Trend?
There hasn't been much to report for Hotel Royal's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Hotel Royal in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
The Bottom Line
In a nutshell, Hotel Royal has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has declined 40% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
If you're still interested in Hotel Royal it's worth checking out our FREE intrinsic value approximation for H12 to see if it's trading at an attractive price in other respects.