If you’re searching for your next potential multi-bagger investment, there are two key financial trends to watch for: a rising return on capital employed (ROCE) and an increasing amount of capital being put to work. Companies that exhibit both traits are often compounding machines — businesses that consistently reinvest their profits at higher rates of return. One company that stands out in this regard is InterContinental Hotels Group (LON:IHG).
Understanding ROCE
ROCE is a useful metric that shows how efficiently a company generates pre-tax profit from the capital it uses in its operations. It’s calculated as:
Return on Capital Employed = EBIT ÷ (Total Assets – Current Liabilities)
For InterContinental Hotels Group, the ROCE based on the trailing twelve months to December 2024 is:
0.37 = US$1.0 billion ÷ (US$4.7 billion – US$1.9 billion)
This gives IHG an impressive ROCE of 37%, significantly outperforming the average of 7.4% in the broader hospitality industry.
A Promising Trend
What’s particularly encouraging is the trend in IHG’s ROCE over the past five years. While the company has kept its capital base relatively stable, its ROCE has increased by 25%. This suggests that IHG has become more efficient at generating returns without needing to invest significantly more capital — a strong indicator of operational improvement and smart management.
However, it’s worth noting that the company has a relatively high level of current liabilities, accounting for 41% of its total assets. This reliance on short-term obligations could pose some risk, and ideally, a lower ratio would be preferable to reduce financial vulnerability.
Investor Confidence and Performance
Investors appear to have taken notice of IHG’s improving fundamentals. Over the past five years, the company’s stock has delivered a remarkable 151% return. This strong performance aligns with the company’s rising efficiency and profitability.
Looking Ahead
While the historical data paints a positive picture, it’s important to consider what lies ahead. For a deeper dive into future expectations, you can explore the latest analyst forecasts for InterContinental Hotels Group here.
In Summary
InterContinental Hotels Group is showing encouraging signs of becoming a long-term compounder. Its rising ROCE, achieved without increasing capital investment, reflects improved operational efficiency. Given the strong shareholder returns and solid fundamentals, the company warrants further research.
That said, investors should also be aware of potential risks. Our analysis has identified three warning signs that are worth reviewing before making any investment decisions.
If you’re interested in other companies with strong returns and solid financials, check out this free list of high-ROE stocks with robust balance sheets.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is based on historical data and analyst forecasts using an unbiased methodology. It does not take into account your personal financial situation or investment goals. Simply Wall St has no position in any of the stocks mentioned. For feedback or concerns, please contact editorial-team@simplywallst.com.
Source: finance.yahoo.com