Yahoo Finance Here's What To Make Of Red Rock Resorts' (NASDAQ:RRR) Returns On Capital
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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 Red Rock Resorts (NASDAQ:RRR) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Red Rock Resorts is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.015 = US$57m ÷ (US$4.0b - US$201m) (Based on the trailing twelve months to June 2020).
So, Red Rock Resorts has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 6.7%.
Check out our latest analysis for Red Rock Resorts
In the above chart we have a measured Red Rock Resorts' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Red Rock Resorts here for free.
What Can We Tell From Red Rock Resorts' ROCE Trend?
When we looked at the ROCE trend at Red Rock Resorts, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.5% from 10% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. 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.
The Bottom Line On Red Rock Resorts' ROCE
We're a bit apprehensive about Red Rock Resorts because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last three years have experienced a 31% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
On a final note, we found 2 warning signs for Red Rock Resorts (1 shouldn't be ignored) you should be aware of.
While Red Rock 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. 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.
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