If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. In light of that, when we looked at Hotel Properties (SGX:H15) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Hotel Properties, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.017 = S$65m ÷ (S$4.4b - S$437m) (Based on the trailing twelve months to June 2024).

So, Hotel Properties has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 5.5%.

Check out our latest analysis for Hotel Properties

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hotel Properties' ROCE against it's prior returns. If you're interested in investigating Hotel Properties' past further, check out this free graph covering Hotel Properties' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Hotel Properties, we didn't gain much confidence. To be more specific, ROCE has fallen from 2.5% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

While returns have fallen for Hotel Properties in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 11% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you'd like to know more about Hotel Properties, we've spotted 2 warning signs, and 1 of them is significant.