Be Wary Of Wyndham Hotels & Resorts (NYSE:WH) And Its Returns On Capital

By
Simply Wall St
Published
September 27, 2021
NYSE:WH
Source: Shutterstock

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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Wyndham Hotels & Resorts (NYSE:WH) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. To calculate this metric for Wyndham Hotels & Resorts, this is the formula:

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

0.077 = US$297m ÷ (US$4.2b - US$361m) (Based on the trailing twelve months to June 2021).

Thus, Wyndham Hotels & Resorts has an ROCE of 7.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.7%.

See our latest analysis for Wyndham Hotels & Resorts

roce
NYSE:WH Return on Capital Employed September 27th 2021

In the above chart we have measured Wyndham Hotels & Resorts' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Wyndham Hotels & Resorts.

How Are Returns Trending?

On the surface, the trend of ROCE at Wyndham Hotels & Resorts doesn't inspire confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 7.7%. 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.

On a related note, Wyndham Hotels & Resorts has decreased its current liabilities to 8.5% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

In summary, we're somewhat concerned by Wyndham Hotels & Resorts' diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last three yearsthe stock has delivered a respectable 47% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Wyndham Hotels & Resorts (of which 1 is a bit concerning!) that you should know about.

While Wyndham Hotels & Resorts 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.