Jiangsu Tianmu Lake TourismLtd (SHSE:603136) Might Be Having Difficulty Using Its Capital Effectively

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Jiangsu Tianmu Lake TourismLtd (SHSE:603136), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Jiangsu Tianmu Lake TourismLtd:

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

0.12 = CN¥187m ÷ (CN¥1.7b - CN¥199m) (Based on the trailing twelve months to September 2023).

Therefore, Jiangsu Tianmu Lake TourismLtd has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 8.4% it's much better.

Check out our latest analysis for Jiangsu Tianmu Lake TourismLtd

In the above chart we have measured Jiangsu Tianmu Lake TourismLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Jiangsu Tianmu Lake TourismLtd .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Jiangsu Tianmu Lake TourismLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 16% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Jiangsu Tianmu Lake TourismLtd. These trends are starting to be recognized by investors since the stock has delivered a 22% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Jiangsu Tianmu Lake TourismLtd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 603136 on our platform quite valuable.

While Jiangsu Tianmu Lake TourismLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.