Yahoo Finance InterContinental Hotels Group PLC (LON:IHG) Earns Among The Best Returns In Its Industry
Today we’ll evaluate InterContinental Hotels Group PLC (LON:IHG) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we’ll work out how to calculate ROCE. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for InterContinental Hotels Group:
0.30 = US$709m ÷ (US$3.8b – US$1.4b) (Based on the trailing twelve months to December 2018.)
So, InterContinental Hotels Group has an ROCE of 30%.
Check out our latest analysis for InterContinental Hotels Group
Is InterContinental Hotels Group’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. InterContinental Hotels Group’s ROCE appears to be substantially greater than the 8.7% average in the Hospitality industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, InterContinental Hotels Group’s ROCE in absolute terms currently looks quite high.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do InterContinental Hotels Group’s Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.
InterContinental Hotels Group has total liabilities of US$1.4b and total assets of US$3.8b. As a result, its current liabilities are equal to approximately 37% of its total assets. A medium level of current liabilities boosts InterContinental Hotels Group’s ROCE somewhat.
Our Take On InterContinental Hotels Group’s ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. Of course you might be able to find a better stock than InterContinental Hotels Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
