The Returns On Capital At TravelSky Technology (HKG:696) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 TravelSky Technology (HKG:696), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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 TravelSky Technology:

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

0.062 = CN¥1.3b ÷ (CN¥28b - CN¥6.2b) (Based on the trailing twelve months to December 2023).

Therefore, TravelSky Technology has an ROCE of 6.2%. Even though it's in line with the industry average of 6.1%, it's still a low return by itself.

See our latest analysis for TravelSky Technology

In the above chart we have measured TravelSky Technology'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 TravelSky Technology for free.

So How Is TravelSky Technology's ROCE Trending?

On the surface, the trend of ROCE at TravelSky Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.2% from 13% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for TravelSky Technology. And there could be an opportunity here if other metrics look good too, because the stock has declined 36% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

While TravelSky Technology doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 696 on our platform.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.