The Returns On Capital At GreenTree Hospitality Group (NYSE:GHG) Don't Inspire Confidence

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing 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.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on GreenTree Hospitality Group is:

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

0.099 = CN¥319m ÷ (CN¥4.1b - CN¥870m) (Based on the trailing twelve months to December 2020).

Thus, GreenTree Hospitality Group has an ROCE of 9.9%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 5.0%.

View our latest analysis for GreenTree Hospitality Group

In the above chart we have measured GreenTree Hospitality Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

On the surface, the trend of ROCE at GreenTree Hospitality Group doesn't inspire confidence. Around five years ago the returns on capital were 28%, but since then they've fallen to 9.9%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On GreenTree Hospitality Group's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for GreenTree Hospitality Group have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last three years have experienced a 11% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to continue researching GreenTree Hospitality Group, you might be interested to know about the 2 warning signs that our analysis has discovered.

While GreenTree Hospitality Group 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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