Investors Shouldn't Overlook The Favourable Returns On Capital At InterContinental Hotels Group (LON:IHG)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over InterContinental Hotels Group's (LON:IHG) trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for InterContinental Hotels Group, this is the formula:

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

0.34 = US$893m ÷ (US$4.2b - US$1.5b) (Based on the trailing twelve months to June 2023).

Thus, InterContinental Hotels Group has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 7.3%.

Check out our latest analysis for InterContinental Hotels Group

Above you can see how the current ROCE for InterContinental Hotels Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering InterContinental Hotels Group here for free.

The Trend Of ROCE

It's hard not to be impressed by InterContinental Hotels Group's returns on capital. Over the past five years, ROCE has remained relatively flat at around 34% and the business has deployed 37% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.

The Bottom Line

In summary, we're delighted to see that InterContinental Hotels Group has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has followed suit returning a meaningful 78% to shareholders over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you'd like to know about the risks facing InterContinental Hotels Group, we've discovered 2 warning signs that you should be aware of.

InterContinental Hotels Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.