If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Mandarin Oriental International (SGX:M04) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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 Mandarin Oriental International is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.033 = US$102m ÷ (US$3.7b - US$625m) (Based on the trailing twelve months to December 2023).
So, Mandarin Oriental International has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 4.1%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Mandarin Oriental International's ROCE against it's prior returns. If you'd like to look at how Mandarin Oriental International has performed in the past in other metrics, you can view this free graph of Mandarin Oriental International's past earnings, revenue and cash flow.
How Are Returns Trending?
In terms of Mandarin Oriental International's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.3% from 6.3% five years ago. 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.
On a side note, Mandarin Oriental International has done well to pay down its current liabilities to 17% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Mandarin Oriental International. And there could be an opportunity here if other metrics look good too, because the stock has declined 11% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
On a final note, we found 2 warning signs for Mandarin Oriental International (1 is potentially serious) you should be aware of.
While Mandarin Oriental International isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.