To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at GreenTree Hospitality Group (NYSE:GHG) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for GreenTree Hospitality Group, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.085 = CN¥328m ÷ (CN¥5.1b - CN¥1.2b) (Based on the trailing twelve months to September 2024).

Thus, GreenTree Hospitality Group has an ROCE of 8.5%. On its own, that's a low figure but it's around the 9.4% average generated by the Hospitality industry.

Check out our latest analysis for GreenTree Hospitality Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for GreenTree Hospitality Group's ROCE against it's prior returns. If you'd like to look at how GreenTree Hospitality Group has performed in the past in other metrics, you can view this free graph of GreenTree Hospitality Group's past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at GreenTree Hospitality Group doesn't inspire confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 8.5%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Key Takeaway

We're a bit apprehensive about GreenTree Hospitality Group because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Unsurprisingly then, the stock has dived 74% over the last five years, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about GreenTree Hospitality Group, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

While GreenTree Hospitality Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.