Today we are going to look at Red Rock Resorts, Inc. (NASDAQ:RRR) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First, 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.
What is Return On Capital Employed (ROCE)?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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 Red Rock Resorts:
0.076 = US$290m ÷ (US$4.1b - US$297m) (Based on the trailing twelve months to June 2019.)
So, Red Rock Resorts has an ROCE of 7.6%.
Is Red Rock Resorts's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see Red Rock Resorts's ROCE is around the 8.9% average reported by the Hospitality industry. Setting aside the industry comparison for now, Red Rock Resorts's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
We can see that , Red Rock Resorts currently has an ROCE of 7.6%, less than the 11% it reported 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how Red Rock Resorts's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Red Rock Resorts's Current Liabilities Impact Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Red Rock Resorts has total liabilities of US$297m and total assets of US$4.1b. As a result, its current liabilities are equal to approximately 7.2% of its total assets. With low levels of current liabilities, at least Red Rock Resorts's mediocre ROCE is not unduly boosted.
Our Take On Red Rock Resorts's ROCE
If performance improves, then Red Rock Resorts may be an OK investment, especially at the right valuation. Of course, you might also be able to find a better stock than Red Rock Resorts. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Thank you for reading.