If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Hotel Royal (SGX:H12), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Hotel Royal:

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

0.013 = S$11m ÷ (S$827m - S$22m) (Based on the trailing twelve months to December 2023).

So, Hotel Royal has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 4.5%.

See our latest analysis for Hotel Royal

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hotel Royal'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 Hotel Royal.

How Are Returns Trending?

There is reason to be cautious about Hotel Royal, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 1.8% that they were earning five years ago. 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 Hotel Royal to turn into a multi-bagger.

Our Take On Hotel Royal's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 42% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.