Returns On Capital At GreenTree Hospitality Group (NYSE:GHG) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at GreenTree Hospitality Group (NYSE:GHG) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 GreenTree Hospitality Group:

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

0.11 = CN¥421m ÷ (CN¥5.2b - CN¥1.5b) (Based on the trailing twelve months to September 2023).

Therefore, GreenTree Hospitality Group has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 9.6% generated by the Hospitality industry.

See our latest analysis for GreenTree Hospitality Group

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 analyst report for GreenTree Hospitality Group .

What Can We Tell From GreenTree Hospitality Group's ROCE Trend?

On the surface, the trend of ROCE at GreenTree Hospitality Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 11% from 22% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On GreenTree Hospitality Group's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for GreenTree Hospitality Group have fallen, meanwhile the business is employing more capital than it was five years ago. Unsurprisingly then, the stock has dived 74% over the last five years, so investors are recognizing these changes and don't like the company's prospects. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

GreenTree Hospitality Group does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.