Yahoo Finance Be Wary Of Millennium & Copthorne Hotels New Zealand (NZSE:MCK) And Its Returns On Capital
What financial metrics can indicate to us that a company is maturing or even in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, Millennium & Copthorne Hotels New Zealand (NZSE:MCK) we aren't filled with optimism, but let's investigate further.
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. To calculate this metric for Millennium & Copthorne Hotels New Zealand, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = NZ$43m ÷ (NZ$709m - NZ$31m) (Based on the trailing twelve months to December 2022).
So, Millennium & Copthorne Hotels New Zealand has an ROCE of 6.4%. In absolute terms, that's a low return but it's around the Hospitality industry average of 7.0%.
View our latest analysis for Millennium & Copthorne Hotels New Zealand
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're interested in investigating Millennium & Copthorne Hotels New Zealand's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Millennium & Copthorne Hotels New Zealand Tell Us?
There is reason to be cautious about Millennium & Copthorne Hotels New Zealand, given the returns are trending downwards. About five years ago, returns on capital were 9.1%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Millennium & Copthorne Hotels New Zealand becoming one if things continue as they have.
Our Take On Millennium & Copthorne Hotels New Zealand's ROCE
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. Long term shareholders who've owned the stock over the last five years have experienced a 26% 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.
On a final note, we found 2 warning signs for Millennium & Copthorne Hotels New Zealand (1 is significant) you should be aware of.
While Millennium & Copthorne Hotels New Zealand isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
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