Red Rock Resorts (NASDAQ:RRR) Is Very Good At Capital Allocation

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Red Rock Resorts' (NASDAQ:RRR) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Red Rock Resorts:

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

0.20 = US$582m ÷ (US$3.1b - US$227m) (Based on the trailing twelve months to June 2022).

Thus, Red Rock Resorts has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 9.6%.

Check out the opportunities and risks within the US Hospitality industry.

Above you can see how the current ROCE for Red Rock Resorts compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Red Rock Resorts.

What The Trend Of ROCE Can Tell Us

Red Rock Resorts is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 106% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Bottom Line On Red Rock Resorts' ROCE

In summary, we're delighted to see that Red Rock Resorts has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 83% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching Red Rock Resorts, you might be interested to know about the 4 warning signs that our analysis has discovered.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.