Should You Be Impressed By Hilton Grand Vacations' (NYSE:HGV) Returns on Capital?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return.

Having said that, from a first glance at Hilton Grand Vacations (NYSE:HGV) we aren’t jumping out of our chairs at how returns are trending, but let’s have a deeper look.

What is Return On Capital Employed (ROCE)?

If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Hilton Grand Vacations: Return on Capital Employed = Earnings Before Interest and Tax (EBIT) / (Total Assets – Current Liabilities)

0.044 = US£151m / (US£3.6b – US£187m) (Based on the trailing twelve months to June 2020). Thus, Hilton Grand Vacations has an ROCE of 4.4%. On its own, that’s a low figure but it’s around the 5.4% average generated by the Hospitality industry. Check out our latest analysis for Hilton Grand Vacations

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In the above chart we have measured Hilton Grand Vacations’ 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 report for Hilton Grand Vacations.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Hilton Grand Vacations, we didn’t gain much confidence. Around five years ago the returns on capital were 21%, but since then they’ve fallen to 4.4%. Given the business is employing more capital while revenue has slipped, this is a bit concerning.

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.
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In Conclusion…

From the above analysis, we find it rather worrisome that returns on capital and sales for Hilton Grand Vacations have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 43% over the last three years, so it looks like investors are recognizing these changes.

With underlying trends that aren’t great in these areas, we’d consider looking elsewhere. If you want to know some of the risks facing Hilton Grand Vacations we’ve found 2 warning signs (1 is concerning!) that you should be aware of before investing here. While Hilton Grand Vacations 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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