Capital Allocation Trends At China Tourism Group Duty Free (SHSE:601888) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at China Tourism Group Duty Free (SHSE:601888) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for China Tourism Group Duty Free:

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

0.11 = CN¥7.1b ÷ (CN¥80b - CN¥14b) (Based on the trailing twelve months to June 2024).

Thus, China Tourism Group Duty Free has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Specialty Retail industry average of 4.5% it's much better.

View our latest analysis for China Tourism Group Duty Free

In the above chart we have measured China Tourism Group Duty Free'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 China Tourism Group Duty Free for free.

What Can We Tell From China Tourism Group Duty Free's ROCE Trend?

On the surface, the trend of ROCE at China Tourism Group Duty Free doesn't inspire confidence. Around five years ago the returns on capital were 31%, but since then they've fallen to 11%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From China Tourism Group Duty Free's ROCE

Bringing it all together, while we're somewhat encouraged by China Tourism Group Duty Free's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 21% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to continue researching China Tourism Group Duty Free, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.

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