Booking Holdings (NASDAQ:BKNG) May Have Issues Allocating Its Capital
Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Booking Holdings (NASDAQ:BKNG), the trends above didn't look too great.
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 Booking Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$2.6b ÷ (US$24b - US$6.2b) (Based on the trailing twelve months to December 2021).
Thus, Booking Holdings has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 9.5% it's much better.
View our latest analysis for Booking Holdings
Above you can see how the current ROCE for Booking Holdings 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 report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
In terms of Booking Holdings' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 23%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Booking Holdings becoming one if things continue as they have.
On a side note, Booking Holdings' current liabilities have increased over the last five years to 26% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 15%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
Our Take On Booking Holdings' ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 27% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
On a separate note, we've found 1 warning sign for Booking Holdings you'll probably want to know about.
While Booking Holdings 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.
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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.
