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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 GreenTree Hospitality Group (NYSE:GHG), 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. To calculate this metric for GreenTree Hospitality Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.091 = CN¥360m ÷ (CN¥5.1b - CN¥1.2b) (Based on the trailing twelve months to June 2024).
Thus, GreenTree Hospitality Group has an ROCE of 9.1%. In absolute terms, that's a low return but it's around the Hospitality industry average of 10%.
See our latest analysis for GreenTree Hospitality Group
Above you can see how the current ROCE for GreenTree Hospitality Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for GreenTree Hospitality Group .
What Does the ROCE Trend For GreenTree Hospitality Group Tell Us?
When we looked at the ROCE trend at GreenTree Hospitality Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.1% from 20% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Our Take On GreenTree Hospitality Group's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that GreenTree Hospitality Group is reinvesting for growth and has higher sales as a result. But since the stock has dived 71% in the last five years, there could be other drivers that are influencing the business' outlook. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.