Hyatt Hotels (NYSE:H) Is Reinvesting At Lower Rates Of Return

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Hyatt Hotels (NYSE:H) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Hyatt Hotels:

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

0.017 = US$174m ÷ (US$13b - US$2.4b) (Based on the trailing twelve months to June 2022).

So, Hyatt Hotels has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 10%.

See our latest analysis for Hyatt Hotels

Above you can see how the current ROCE for Hyatt Hotels 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 Hyatt Hotels here for free.

How Are Returns Trending?

When we looked at the ROCE trend at Hyatt Hotels, we didn't gain much confidence. Around five years ago the returns on capital were 4.2%, but since then they've fallen to 1.7%. 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. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Hyatt Hotels' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Hyatt Hotels is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 56% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a final note, we found 3 warning signs for Hyatt Hotels (1 is significant) you should be aware of.

While Hyatt Hotels 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.