What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Wyndham Hotels & Resorts (NYSE:WH), we don't think it's current trends fit the mold of a multi-bagger.
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. Analysts use this formula to calculate it for Wyndham Hotels & Resorts:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$514m ÷ (US$4.3b - US$380m) (Based on the trailing twelve months to March 2022).
So, Wyndham Hotels & Resorts has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 9.5% it's much better.
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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Wyndham Hotels & Resorts' ROCE Trend?
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 13%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, Wyndham Hotels & Resorts has done well to pay down its current liabilities to 8.9% of total assets. So we could link some of this to the decrease in ROCE. 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 Bottom Line
In summary, despite lower returns in the short term, we're encouraged to see that Wyndham Hotels & Resorts is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 63% to shareholders over the last three years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
Like most companies, Wyndham Hotels & Resorts does come with some risks, and we've found 1 warning sign that you should be aware of.
While Wyndham Hotels & Resorts isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Valuation is complex, but we're helping make it simple.
Find out whether Wyndham Hotels & Resorts is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.