Red Rock Resorts (NASDAQ:RRR) Shareholders Will Want The ROCE Trajectory To Continue

By
Simply Wall St
Published
February 18, 2022
NasdaqGS:RRR
Source: Shutterstock

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Red Rock Resorts' (NASDAQ:RRR) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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)

0.17 = US$561m ÷ (US$3.5b - US$227m) (Based on the trailing twelve months to December 2021).

Thus, Red Rock Resorts has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 9.0% it's much better.

See our latest analysis for Red Rock Resorts

roce
NasdaqGS:RRR Return on Capital Employed February 18th 2022

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.

So How Is Red Rock Resorts' ROCE Trending?

Red Rock Resorts' ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 55% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Key Takeaway

As discussed above, Red Rock Resorts appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 153% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, Red Rock Resorts does come with some risks, and we've found 2 warning signs that you should be aware of.

While Red Rock Resorts may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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