The Trends At Red Rock Resorts (NASDAQ:RRR) That You Should Know About

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Red Rock Resorts (NASDAQ:RRR), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Red Rock Resorts:

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

roce

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

When we looked at the ROCE trend at Red Rock Resorts, we didn't gain much confidence. To be more specific, ROCE has fallen from 10% over the last five years. 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 Key Takeaway

In summary, we're somewhat concerned by Red Rock Resorts' diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 31% from where it was three years ago. Unless these trends revert to a more positive trajectory, we would look elsewhere.

One more thing: We've identified 2 warning signs with Red Rock Resorts (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

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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