Beware of Wyndham Hotels & Resorts (NYSE: WH) and its returns on capital

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If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should watch out for. First, we would like to identify a growth to recover on capital employed (ROCE) and at the same time, a based capital employed. This shows us that it is a composing machine, capable of continually reinvesting its profits in the business and generating higher returns. In light of this, when we looked at Wyndham Hotels & Resorts (NYSE: WH) and its ROCE trend, we weren’t exactly thrilled.

Understanding Return on Capital Employed (ROCE)

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for Wyndham Hotels & Resorts, here is the formula:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.077 = US $ 297 million ÷ (US $ 4.2 billion – US $ 361 million) (Based on the last twelve months up to June 2021).

Thereby, Wyndham Hotels & Resorts has a ROCE of 7.7%. On its own, this is a low return on capital, but it is in line with industry average returns of 7.7%.

See our latest review for Wyndham Hotels & Resorts

NYSE: WH Return on Capital Employed September 27, 2021

In the graph above, we’ve measured Wyndham Hotels & Resorts’ past ROCE versus past performance, but the future is arguably more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Wyndham Hotels & Resorts.

How are the returns evolving?

On the surface, the ROCE trend at Wyndham Hotels & Resorts does not inspire confidence. About five years ago, returns on capital were 18%, but since then they have fallen to 7.7%. Considering that the company is employing more capital while revenues have declined, this is a bit of a concern. This could mean that the company is losing its competitive advantage or market share, because even if more money is invested in companies, it actually produces a lower return – “less bang for the buck” per se.

On a related note, Wyndham Hotels & Resorts reduced its current liabilities to 8.5% of total assets. This could partly explain the drop in ROCE. In effect, this means that their suppliers or short-term creditors fund the business less, which reduces some elements of risk. Since the company essentially finances a larger portion of its operations with its own money, you could argue that this has made the company less efficient at generating ROCE.

The key to take away

In summary, we are somewhat concerned about the diminishing returns of Wyndham Hotels & Resorts on increasing amounts of capital. But investors should expect some sort of improvement because over the past three years, the stock has generated a respectable return of 47%. Regardless, we don’t feel very comfortable with the fundamentals so we’re avoiding this title for now.

Since virtually every business faces risks, it’s worth knowing about them, and we’ve spotted 2 warning signs for Wyndham Hotels & Resorts (1 of which is a bit disturbing!) that you should know about.

While Wyndham Hotels & Resorts does not currently achieve the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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