Today we'll evaluate Hilton Grand Vacations Inc. (NYSE:HGV) to determine whether it could have potential as an investment idea. 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.
First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
So, How Do We Calculate ROCE?
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:
0.12 = US$328m ÷ (US$3.1b - US$237m) (Based on the trailing twelve months to December 2019.)
Therefore, Hilton Grand Vacations has an ROCE of 12%.
Is Hilton Grand Vacations's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Hilton Grand Vacations's ROCE appears to be substantially greater than the 8.5% average in the Hospitality industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Hilton Grand Vacations compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Hilton Grand Vacations's current ROCE of 12% is lower than its ROCE in the past, which was 18%, 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Hilton Grand Vacations's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Hilton Grand Vacations's Current Liabilities Skew Its ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Hilton Grand Vacations has total assets of US$3.1b and current liabilities of US$237m. As a result, its current liabilities are equal to approximately 7.7% of its total assets. In addition to low current liabilities (making a negligible impact on ROCE), Hilton Grand Vacations earns a sound return on capital employed.
Our Take On 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 shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
If you spot an error that warrants correction, please contact the editor at email@example.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.
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