Hotel Royal's (SGX:H12) Returns On Capital Not Reflecting Well On The Business

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Hotel Royal (SGX:H12), we've spotted some signs that it could be struggling, so let's investigate.

What Is 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. The formula for this calculation on Hotel Royal is:

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

0.013 = S$10m ÷ (S$813m - S$35m) (Based on the trailing twelve months to June 2023).

Thus, Hotel Royal has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 4.3%.

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'd like to look at how Hotel Royal has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Hotel Royal's ROCE Trending?

In terms of Hotel Royal's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 2.0% five years ago, but since then it has dropped noticeably. 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 Royal becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Hotel Royal is generating lower returns from the same amount of capital. 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Hotel Royal (of which 2 are significant!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.