Choice Hotels International (NYSE:CHH) Could Be Struggling To Allocate Capital

By
Simply Wall St
Published
January 21, 2022
NYSE:CHH
Source: Shutterstock

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Looking at Choice Hotels International (NYSE:CHH), it does have a high ROCE right now, but lets see how returns are trending.

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

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. The formula for this calculation on Choice Hotels International is:

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

0.28 = US$356m ÷ (US$1.9b - US$591m) (Based on the trailing twelve months to September 2021).

Thus, Choice Hotels International has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 9.0%.

See our latest analysis for Choice Hotels International

roce
NYSE:CHH Return on Capital Employed January 21st 2022

Above you can see how the current ROCE for Choice Hotels International 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 Choice Hotels International.

What Can We Tell From Choice Hotels International's ROCE Trend?

In terms of Choice Hotels International's historical ROCE movements, the trend isn't fantastic. While it's comforting that the ROCE is high, five years ago it was 40%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Choice Hotels International. And the stock has done incredibly well with a 161% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we've found 1 warning sign for Choice Hotels International that we think you should be aware of.

Choice Hotels International 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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