There are some key trends to look for if we are to identify the next multi-excavator. First, we want a proven return on investment (ROCE) that is increasing, and second, we want a growing base of capital employed. Basically, this means that a company has profitable initiatives that it can continue to reinvest in, which is a characteristic of a compounding machine. However, after a quick look at the numbers, we don’t think National Society for Tourism and Hotels (ADX: NCTH) has what it takes to be a multi-excavator, but let’s see why that is.

What is Return on Capital Employed (ROCE)?

If you’ve never worked with ROCE, it measures the “return” (pre-tax profit) a company makes on the capital invested in its business. The formula for this calculation by the National Corporation for Tourism and Hotels is:

Return on investment = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)

0.044 = m. إ 87 m ÷ (د.إ 2.3 b – د.إ 344 m) (based on the last twelve months up to September 2020).

So, The National Corporation for Tourism and Hotels has a ROCE of 4.4%. This is a small return on its own, but compared to the 3.0% average generated by the hospitality industry, it is much better.

Check out our latest analysis for National Corporation for Tourism and Hotels

ADX: NCTH Return on Capital Employed January 14, 2021

Historical performance is a good place to start researching stocks, so above you can see the measure of ROCE for the National Corporation for Tourism and Hotels based on previous returns. If you want to dig into the historical earnings, earnings, and cash flow of the National Corporation for Tourism and Hotels, read this one free Graphics here.

What the ROCE trend can tell us

On the surface, the ROCE trend is not instilling confidence in the National Corporation for Tourism and Hotels. Around five years ago the return on investment was 16%, since then it has fallen to 4.4%. In the meantime, the company is consuming more capital, but this hasn’t moved the needle much in terms of sales over the past 12 months so this could reflect longer-term investments. It pays to keep an eye on the company’s profits from now on to see if these investments ultimately contribute to the company’s bottom line.

In this context, the National Corporation for Tourism and Hotels has reduced its short-term debt to 15% of total assets. So we could relate some of that to the decline in ROCE. In effect, this means that their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the company is basically funding a greater chunk of its business with its own money, it could be argued that this has made the business less efficient at generating ROCE.

The conclusion of the National Corporation for Tourism and Hotel ROCE

To sum up, the National Corporation for Tourism and Hotels is reinvesting funds in the business for growth. Unfortunately, sales don’t seem to have increased that much yet. Additionally, the stock’s total return to shareholders was flat over the past five years, which isn’t too surprising. All in all, the inherent trends are not typical of multi-excavators. So if that’s what you’re looking for, you’re likely to have better luck elsewhere.

One more thing to note we have identified 1 warning sign with the National Corporation for Tourism and Hotels and understand that it should be part of your investment process.

While the National Corporation for Tourism and Hotels may not have the highest returns right now, we’ve compiled a list of companies that currently have a return on equity greater than 25%. look at that free List here.

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