What’s the ROCE?

You probably noticed that all deals on R2U have a profitability indicator called ROCE. But what is it? What does it mean? and how should it be used?

What does ROCE mean?

ROCE stands for Return On Capital Employed. It’s a fairly simple ratio between the cash an investor puts into a deal in order to get a property guest-ready, and the cash the investor earns in a year.

How is ROCE calculated?

We include as costs in the ROCE calculation the first rent, the deposit, the sourcing fee and the furniture. While the deposit is not a cost per se, as you should be getting it back at some point, it’s still cash you need to pay to get started, and cash you won’t have at your disposal for the entire duration of the contract.

We include in the revenue side of the ROCE calculation a simple estimate of the gross revenue based on 2 assumptions: occupancy and nightly rate. These are averages and are estimates, based on what similar properties are achieving in the area. So while definitely to be taken with a pinch of salt, they are all estimated based on the same principles, so they provide a good service in making all deals comparable.

Why does R2U not provide the full PL break-down?

If you’re looking for the full PL breakdown that some deal sourcers provide you won’t find it on any R2U deal.
The reason is straight forward: Sourcers figures are rarely actually used.

No investor worth its salt bases his decisions on the PL prepared by the deal sourcer. No offense to deal sourcers, but any serious investor will still do his numbers from scratch, precisely because its his responsibility to make sure the deal will be profitable and no one else’s. So why bother uploading figures that are not used?

Several choices in the hands of the investor/manager can also shape a deal PL, making the sourcer’s number even less relevant. Things like cleaning costs, linens management, buying furniture vs leasing it, level of luxury and many other decisions can change the profitability of a deal and are best handled by the investors.

So how should ROCE be used?

Having a top-level indicator of profitability like the ROCE for all deals it’s what makes them comparable. Precisely because it only takes into account few top-line parameters it can act as a meaningful element of comparison between deals that could otherwise look very different.

So when investors see a deal with a higher ROCE that stands out from the crowd, they know that deal has got some really powerful fundamentals lined up. So ultimately the ROCE can be an early indicator of performance, useful to take a first pass at deals to shortlist those worth further investigation.