Yahoo Finance Returns On Capital Signal Difficult Times Ahead For Millennium & Copthorne Hotels New Zealand (NZSE:MCK)
Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Millennium & Copthorne Hotels New Zealand (NZSE:MCK), we've spotted some signs that it could be struggling, so let's investigate.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)
0.046 = NZ$32m ÷ (NZ$747m - NZ$50m) (Based on the trailing twelve months to December 2023).
Thus, Millennium & Copthorne Hotels New Zealand has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 6.7%.
View our latest analysis for Millennium & Copthorne Hotels New Zealand
Historical performance is a great place to start when researching a stock so above you can see the gauge for Millennium & Copthorne Hotels New Zealand's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Millennium & Copthorne Hotels New Zealand.
How Are Returns Trending?
In terms of Millennium & Copthorne Hotels New Zealand's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 9.6%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Millennium & Copthorne Hotels New Zealand to turn into a multi-bagger.
In Conclusion...
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 28% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking 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.
