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GreenTree Hospitality Group (NYSE:GHG) Will Be Hoping To Turn Its Returns On Capital Around

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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. However, after briefly looking over the numbers, we don't think GreenTree Hospitality Group (NYSE:GHG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for GreenTree Hospitality Group:

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

0.11 = CN¥347m ÷ (CN¥4.3b - CN¥1.0b) (Based on the trailing twelve months to March 2021).

So, GreenTree Hospitality Group has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 7.1% generated by the Hospitality industry.

See our latest analysis for GreenTree Hospitality Group

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In the above chart we have measured GreenTree Hospitality Group's 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 GreenTree Hospitality Group.

How Are Returns Trending?

In terms of GreenTree Hospitality Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 11% from 27% five years ago. However it looks like GreenTree Hospitality Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

To conclude, we've found that GreenTree Hospitality Group is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 34% in the last three years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a separate note, we've found 2 warning signs for GreenTree Hospitality Group you'll probably want to know about.

While GreenTree Hospitality Group 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. 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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