Today we'll look at Hilton Worldwide Holdings Inc. (NYSE:HLT) and reflect on its potential as an investment. 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.
First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. 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?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Hilton Worldwide Holdings:
0.13 = US$1.6b ÷ (US$15b - US$2.9b) (Based on the trailing twelve months to September 2019.)
Therefore, Hilton Worldwide Holdings has an ROCE of 13%.
Does Hilton Worldwide Holdings Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Hilton Worldwide Holdings's ROCE is meaningfully higher than the 8.5% average in the Hospitality industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Hilton Worldwide Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
In our analysis, Hilton Worldwide Holdings's ROCE appears to be 13%, compared to 3 years ago, when its ROCE was 1.2%. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Hilton Worldwide Holdings's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Hilton Worldwide Holdings's 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.
Hilton Worldwide Holdings has total liabilities of US$2.9b and total assets of US$15b. As a result, its current liabilities are equal to approximately 19% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
What We Can Learn From Hilton Worldwide Holdings's ROCE
With that in mind, Hilton Worldwide Holdings's ROCE appears pretty good. Hilton Worldwide Holdings shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned.
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