Yahoo Finance Hilton Grand Vacations Inc. (NYSE:HGV) Earns Among The Best Returns In Its Industry
Today we'll look at Hilton Grand Vacations Inc. (NYSE:HGV) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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 Hilton Grand Vacations:
0.14 = US$392m ÷ (US$3.0b - US$251m) (Based on the trailing twelve months to June 2019.)
Therefore, Hilton Grand Vacations has an ROCE of 14%.
Check out our latest analysis for Hilton Grand Vacations
Does Hilton Grand Vacations Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Hilton Grand Vacations's ROCE is meaningfully higher than the 8.9% average in the Hospitality industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of where Hilton Grand Vacations sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Hilton Grand Vacations's current ROCE of 14% is lower than its ROCE in the past, which was 22%, 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Hilton Grand Vacations's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Hilton Grand Vacations.
What Are Current Liabilities, And How Do They Affect Hilton Grand Vacations's ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Hilton Grand Vacations has total assets of US$3.0b and current liabilities of US$251m. Therefore its current liabilities are equivalent to approximately 8.4% of its total assets. Low current liabilities have only a minimal impact on Hilton Grand Vacations's ROCE, making its decent returns more credible.
What We Can Learn From Hilton Grand Vacations's ROCE
This is good to see, and while better prospects may exist, Hilton Grand Vacations seems worth researching further. Hilton Grand Vacations looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
I will like Hilton Grand Vacations better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
