If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Millennium & Copthorne Hotels New Zealand (NZSE:MCK), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Millennium & Copthorne Hotels New Zealand is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.058 = NZ$55m ÷ (NZ$984m - NZ$34m) (Based on the trailing twelve months to June 2021).
Thus, Millennium & Copthorne Hotels New Zealand has an ROCE of 5.8%. Even though it's in line with the industry average of 6.0%, it's still a low return by itself.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Millennium & Copthorne Hotels New Zealand, check out these free graphs here.
How Are Returns Trending?
On the surface, the trend of ROCE at Millennium & Copthorne Hotels New Zealand doesn't inspire confidence. To be more specific, ROCE has fallen from 9.7% over the last five years. However it looks like Millennium & Copthorne Hotels New Zealand might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
Our Take On Millennium & Copthorne Hotels New Zealand's ROCE
To conclude, we've found that Millennium & Copthorne Hotels New Zealand is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
Millennium & Copthorne Hotels New Zealand does have some risks though, and we've spotted 1 warning sign for Millennium & Copthorne Hotels New Zealand that you might be interested in.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.