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

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. However, after investigating GreenTree Hospitality Group (NYSE:GHG), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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

0.095 = CN¥354m ÷ (CN¥5.1b - CN¥1.3b) (Based on the trailing twelve months to December 2023).

So, GreenTree Hospitality Group has an ROCE of 9.5%. On its own, that's a low figure but it's around the 10% average generated by the Hospitality industry.

View 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 to see what analysts are forecasting going forward, you should check out our free analyst report for GreenTree Hospitality Group .

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. Around five years ago the returns on capital were 22%, but since then they've fallen to 9.5%. 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 GreenTree Hospitality Group. But since the stock has dived 76% in the last five years, there could be other drivers that are influencing the business' outlook. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

If you're still interested in GreenTree Hospitality Group it's worth checking out our FREE intrinsic value approximation for GHG to see if it's trading at an attractive price in other respects.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.