Returns On Capital Signal Tricky Times Ahead For GreenTree Hospitality Group (NYSE:GHG)

Did you know there are some financial metrics that can provide clues of a potential 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at GreenTree Hospitality Group (NYSE:GHG) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 GreenTree Hospitality Group, this is the formula:

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

0.045 = CN¥155m ÷ (CN¥4.7b - CN¥1.2b) (Based on the trailing twelve months to December 2021).

So, GreenTree Hospitality Group has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 10%.

Check out our latest analysis for GreenTree Hospitality Group

Above you can see how the current ROCE for GreenTree Hospitality 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 GreenTree Hospitality Group here for free.

What Can We Tell From GreenTree Hospitality Group's ROCE Trend?

On the surface, the trend of ROCE at GreenTree Hospitality Group doesn't inspire confidence. To be more specific, ROCE has fallen from 23% over the last five years. 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.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for GreenTree Hospitality Group. And there could be an opportunity here if other metrics look good too, because the stock has declined 51% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we found 3 warning signs for GreenTree Hospitality Group (2 can't be ignored) you should be aware of.

While GreenTree Hospitality Group 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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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.