What trends should we look for to identify stocks that can multiply in value over the long term? Ideally, a company shows two trends. First, a growing return on capital employed (ROCE) and, second, an increasing amount of capital employed. Ultimately, this shows that it is a company that is reinvesting profits with increasing returns. Considering when we looked at each other Formosa International Hotels ((TPE: 2707) and its ROCE trend, we weren’t exactly thrilled.
Return on Capital Employed (ROCE): What is it?
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (rate of return) in relation to the capital employed in the company. To calculate this metric for Formosa International Hotels the formula is:
Return on investment = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)
0.11 = NT $ 814 million ÷ (NT $ 11 billion – NT $ 3.5 billion) (based on the last twelve months through September 2020).
So, Formosa International Hotels has a ROCE of 11%. That’s a satisfactory return in absolute terms, but compared to the hotel industry average of 5.6%, it’s much better.
Check out our latest analysis for Formosa International Hotels
TSEC: 2707 return on investment January 31, 2021
Historical performance is a good place to start studying a stock, so above you can see the measure of Formosa International Hotels ROCE based on its previous returns. If you want to see how Formosa International Hotels has done in the past on other metrics, view this free Graph of past earnings, sales and cash flow.
What is Formosa International Hotels’ ROCE trend?
When we looked at the ROCE trend at Formosa International Hotels, we didn’t gain a lot of trust. More precisely, the ROCE has fallen from 26% in the past five years. And considering that revenue has decreased while more capital has been deployed, we would be cautious. If this continues, you might see a company trying to invest in growth but actually losing market share because sales have not increased.
Finally…
Based on the above analysis, it is rather worrying that Formosa International Hotels’ return on investment and sales have fallen while the company is investing more capital than it was five years ago. Long-term shareholders who have owned the stock for the past five years saw their investment depreciate 21%, so the market may not like these trends either. If these metrics didn’t turn out to be more positive, we’d look elsewhere.
In a separate note we found 3 warning signs for Formosa International Hotels You will probably want to know.
If you are looking for solid, high earning companies, this is the place to check out free List of companies with good balance sheets and impressive returns on equity.
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