Today we are going to look at Asian Hotels (West) Limited (NSE:AHLWEST) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
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 Asian Hotels (West):
0.13 = ₹1.3b ÷ (₹11b - ₹952m) (Based on the trailing twelve months to June 2019.)
Therefore, Asian Hotels (West) has an ROCE of 13%.
Does Asian Hotels (West) Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Asian Hotels (West)'s ROCE is meaningfully better than the 8.1% average in the Hospitality industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the industry comparison for now, Asian Hotels (West)'s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
Our data shows that Asian Hotels (West) currently has an ROCE of 13%, compared to its ROCE of 3.8% 3 years ago. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Asian Hotels (West)'s past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Asian Hotels (West).
Asian Hotels (West)'s Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Asian Hotels (West) has total assets of ₹11b and current liabilities of ₹952m. Therefore its current liabilities are equivalent to approximately 8.6% of its total assets. Asian Hotels (West) has a low level of current liabilities, which have a minimal impact on its uninspiring ROCE.
Our Take On Asian Hotels (West)'s ROCE
If performance improves, then Asian Hotels (West) may be an OK investment, especially at the right valuation. Of course, you might also be able to find a better stock than Asian Hotels (West). So you may wish to see this free collection of other companies that have grown earnings strongly.
Asian Hotels (West) is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.