There Are Reasons To Feel Uneasy About China Tourism Group Duty Free's (SHSE:601888) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. In light of that, when we looked at China Tourism Group Duty Free (SHSE:601888) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on China Tourism Group Duty Free is:

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

0.096 = CN¥6.2b ÷ (CN¥76b - CN¥11b) (Based on the trailing twelve months to September 2024).

Thus, China Tourism Group Duty Free has an ROCE of 9.6%. On its own that's a low return, but compared to the average of 5.0% generated by the Specialty Retail industry, it's much better.

Check out our latest analysis for China Tourism Group Duty Free

Above you can see how the current ROCE for China Tourism Group Duty Free 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 China Tourism Group Duty Free .

The Trend Of ROCE

On the surface, the trend of ROCE at China Tourism Group Duty Free doesn't inspire confidence. To be more specific, ROCE has fallen from 30% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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

To conclude, we've found that China Tourism Group Duty Free is reinvesting in the business, but returns have been falling. Since the stock has declined 10% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing, we've spotted 1 warning sign facing China Tourism Group Duty Free that you might find interesting.

While China Tourism Group Duty Free isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.