Returns Are Gaining Momentum At Red Rock Resorts (NASDAQ:RRR)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So when we looked at Red Rock Resorts (NASDAQ:RRR) and its 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. The formula for this calculation on Red Rock Resorts is:

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

0.18 = US$597m ÷ (US$3.7b - US$320m) (Based on the trailing twelve months to June 2023).

Thus, Red Rock Resorts has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 9.4% generated by the Hospitality industry.

Check out our latest analysis for Red Rock Resorts

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 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' ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 87% whilst employing roughly the same amount of capital. 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. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

Our Take 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. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Red Rock Resorts (of which 1 shouldn't be ignored!) that you should know about.

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. 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.