Emei Shan TourismLtd's (SZSE:000888) Returns On Capital Not Reflecting Well On The Business

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Emei Shan TourismLtd (SZSE:000888), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Emei Shan TourismLtd, this is the formula:

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

0.065 = CN¥202m ÷ (CN¥3.4b - CN¥341m) (Based on the trailing twelve months to September 2023).

So, Emei Shan TourismLtd has an ROCE of 6.5%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 8.4%.

See our latest analysis for Emei Shan TourismLtd

Above you can see how the current ROCE for Emei Shan TourismLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Emei Shan TourismLtd .

What Does the ROCE Trend For Emei Shan TourismLtd Tell Us?

On the surface, the trend of ROCE at Emei Shan TourismLtd doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 6.5%. 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.

What We Can Learn From Emei Shan TourismLtd's ROCE

While returns have fallen for Emei Shan TourismLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 42% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you're still interested in Emei Shan TourismLtd it's worth checking out our FREE intrinsic value approximation for 000888 to see if it's trading at an attractive price in other respects.

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.