Magnificent Hotel Investments (HKG:201) failed to accelerate returns

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Did you know that there are financial metrics that can provide clues of a potential multi-bagger? Typically, we will want to notice a growth trend come back on capital employed (ROCE) and at the same time, a base capital employed. Ultimately, this demonstrates that this is a company that reinvests its earnings at increasing rates of return. Although, when we looked Magnificent hotel investments (HKG:201), it didn’t seem to tick all those boxes.

What is return on capital employed (ROCE)?

For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. The formula for this calculation on Magnificent Hotel Investments is as follows:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.035 = HK$135 million ÷ (HK$4.5 billion – HK$605 million) (Based on the last twelve months to June 2022).

So, Magnificent Hotel Investments posted a ROCE of 3.5%. On its own, that’s a poor return, but compared to the 2.9% average generated by the hospitality industry, it’s much better.

Our analysis indicates that 201 is potentially undervalued!

SEHK:201 Return on capital employed November 10, 2022

Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to dive deep into the earnings, revenue and cash flow history of Magnificent Hotel Investments, check out these free graphics here.

What is the return trend?

There’s not much to report on Magnificent Hotel Investments’ returns and its level of capital employed, as both metrics have remained stable over the past five years. Companies with these characteristics tend to be mature and stable operations, as they are past the growth phase. So unless we see a substantial change at Magnificent Hotel Investments in terms of ROCE and additional investments, we wouldn’t hold our breath that it’s a multi-bagger.

What we can learn from Magnificent Hotel Investments ROCE

In summary, Magnificent Hotel Investments does not increase its profits, but generates stable returns on the same amount of capital used. And over the past five years, the stock has fallen 50%, so the market doesn’t seem too optimistic about these trends strengthening anytime soon. Either way, the stock lacks those features of a multi-bagger discussed above, so if that’s what you’re looking for, we think you’d have better luck elsewhere.

Magnificent Hotel Investments has some risks, we have noticed 2 warning signs (and 1 that shouldn’t be ignored) that we think you should know about.

For those who like to invest in solid companies, look at this free list of companies with strong balance sheets and high returns on equity.

Valuation is complex, but we help make it simple.

Find out if Magnificent hotel investments is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

See the free analysis

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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