What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Magnificent Hotel Investments (HKG:201), the trends above didn't look too great.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Magnificent Hotel Investments, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0041 = HK$17m ÷ (HK$5.0b - HK$762m) (Based on the trailing twelve months to December 2024).
Therefore, Magnificent Hotel Investments has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 7.0%.
See our latest analysis for Magnificent Hotel Investments
Historical performance is a great place to start when researching a stock so above you can see the gauge for Magnificent Hotel Investments' ROCE against it's prior returns. If you're interested in investigating Magnificent Hotel Investments' past further, check out this free graph covering Magnificent Hotel Investments' past earnings, revenue and cash flow .
What The Trend Of ROCE Can Tell Us
We are a bit worried about the trend of returns on capital at Magnificent Hotel Investments. To be more specific, the ROCE was 1.0% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Magnificent Hotel Investments becoming one if things continue as they have.
On a side note, Magnificent Hotel Investments' current liabilities have increased over the last five years to 15% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 0.4%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
The Bottom Line
In summary, it's unfortunate that Magnificent Hotel Investments is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 47% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
On a final note, we've found 1 warning sign for Magnificent Hotel Investments that we think you should be aware of.
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.