In This Article:
Today we'll look at EIH Associated Hotels Limited (NSE:EIHAHOTELS) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for EIH Associated Hotels:
0.15 = ₹555m ÷ (₹4.1b - ₹471m) (Based on the trailing twelve months to June 2019.)
So, EIH Associated Hotels has an ROCE of 15%.
Check out our latest analysis for EIH Associated Hotels
Is EIH Associated Hotels's ROCE Good?
One way to assess ROCE is to compare similar companies. EIH Associated Hotels's ROCE appears to be substantially greater than the 8.1% average in the Hospitality industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Aside from the industry comparison, EIH Associated Hotels's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
We can see that, EIH Associated Hotels currently has an ROCE of 15%, less than the 23% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how EIH Associated Hotels's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.