Investors Met With Slowing Returns on Capital At Hyatt Hotels (NYSE:H)

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Hyatt Hotels (NYSE:H) and its ROCE trend, we weren't exactly thrilled.

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

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. To calculate this metric for Hyatt Hotels, this is the formula:

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

0.037 = US$371m ÷ (US$12b - US$2.4b) (Based on the trailing twelve months to September 2023).

Thus, Hyatt Hotels has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.2%.

See our latest analysis for Hyatt Hotels

In the above chart we have measured Hyatt Hotels' 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.

So How Is Hyatt Hotels' ROCE Trending?

The returns on capital haven't changed much for Hyatt Hotels in recent years. The company has consistently earned 3.7% for the last five years, and the capital employed within the business has risen 45% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Hyatt Hotels' ROCE

As we've seen above, Hyatt Hotels' returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 96% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Hyatt Hotels does have some risks though, and we've spotted 2 warning signs for Hyatt Hotels that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.