Investors Met With Slowing Returns on Capital At Huangshan Tourism DevelopmentLtd (SHSE:600054)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Huangshan Tourism DevelopmentLtd (SHSE:600054) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Huangshan Tourism DevelopmentLtd:

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

0.097 = CN¥502m ÷ (CN¥5.7b - CN¥514m) (Based on the trailing twelve months to September 2024).

Therefore, Huangshan Tourism DevelopmentLtd has an ROCE of 9.7%. On its own, that's a low figure but it's around the 8.7% average generated by the Hospitality industry.

Check out our latest analysis for Huangshan Tourism DevelopmentLtd

In the above chart we have measured Huangshan Tourism DevelopmentLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Huangshan Tourism DevelopmentLtd for free.

What Does the ROCE Trend For Huangshan Tourism DevelopmentLtd Tell Us?

There hasn't been much to report for Huangshan Tourism DevelopmentLtd's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Huangshan Tourism DevelopmentLtd doesn't end up being a multi-bagger in a few years time. This probably explains why Huangshan Tourism DevelopmentLtd is paying out 32% of its income to shareholders in the form of dividends. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

Our Take On Huangshan Tourism DevelopmentLtd's ROCE

We can conclude that in regards to Huangshan Tourism DevelopmentLtd's returns on capital employed and the trends, there isn't much change to report on. Since the stock has gained an impressive 50% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 1 warning sign for Huangshan Tourism DevelopmentLtd that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.