Is GreenTree Hospitality Group Ltd.’s (NYSE:GHG) 23% ROCE Any Good?

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Today we are going to look at GreenTree Hospitality Group Ltd. (NYSE:GHG) to see whether it might be an attractive investment prospect. 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.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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 GreenTree Hospitality Group:

0.23 = CN¥535m ÷ (CN¥3.0b - CN¥675m) (Based on the trailing twelve months to December 2018.)

Therefore, GreenTree Hospitality Group has an ROCE of 23%.

Check out our latest analysis for GreenTree Hospitality Group

Is GreenTree Hospitality Group's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that GreenTree Hospitality Group's ROCE is meaningfully better than the 10% average in the Hospitality industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, GreenTree Hospitality Group's ROCE in absolute terms currently looks quite high.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for GreenTree Hospitality Group.

GreenTree Hospitality Group's Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

GreenTree Hospitality Group has total assets of CNÂ¥3.0b and current liabilities of CNÂ¥675m. As a result, its current liabilities are equal to approximately 22% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.

The Bottom Line On GreenTree Hospitality Group's ROCE

With low current liabilities and a high ROCE, GreenTree Hospitality Group could be worthy of further investigation. GreenTree Hospitality Group looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.