If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Red Rock Resorts (NASDAQ:RRR), we don’t think it’s current trends fit the mold of a multi-bagger.
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 Red Rock Resorts, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.015 = US$57m ÷ (US$4.0b – US$201m) (Based on the trailing twelve months to June 2020).
Therefore, Red Rock Resorts has an ROCE of 1.5%. Ultimately, that’s a low return and it under-performs the Hospitality industry average of 6.1%.
In the above chart we have measured Red Rock Resorts’ prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering Red Rock Resorts here for free.
What Does the ROCE Trend For Red Rock Resorts Tell Us?
On the surface, the trend of ROCE at Red Rock Resorts doesn’t inspire confidence. Around five years ago the returns on capital were 10%, but since then they’ve fallen to 1.5%. And considering revenue has dropped while employing more capital, we’d be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven’t increased.
Our Take On Red Rock Resorts’ ROCE
We’re a bit apprehensive about Red Rock Resorts because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven’t taken kindly to these developments, since the stock has declined 21% from where it was three years ago. Unless these trends revert to a more positive trajectory, we would look elsewhere.
Red Rock Resorts does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious…
While Red Rock Resorts 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. 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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