Yahoo Finance Hyatt Hotels' (NYSE:H) Returns On Capital Not Reflecting Well On The Business
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Although, when we looked at Hyatt Hotels (NYSE:H), it didn't seem to tick all of these boxes.
What Is 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. The formula for this calculation on Hyatt Hotels is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.032 = US$270m ÷ (US$12b - US$3.4b) (Based on the trailing twelve months to March 2024).
Therefore, Hyatt Hotels has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 10%.
View 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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Hyatt Hotels .
How Are Returns Trending?
When we looked at the ROCE trend at Hyatt Hotels, we didn't gain much confidence. To be more specific, ROCE has fallen from 4.1% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
On a side note, Hyatt Hotels' current liabilities have increased over the last five years to 29% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.
Our Take On Hyatt Hotels' ROCE
In summary, Hyatt Hotels is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 105% gain to shareholders who have held 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.
One final note, you should learn about the 4 warning signs we've spotted with Hyatt Hotels (including 1 which is potentially serious) .
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.
