There's Been No Shortage Of Growth Recently For Tongcheng Travel Holdings' (HKG:780) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Tongcheng Travel Holdings (HKG:780) so let's look a bit deeper.

Understanding 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 Tongcheng Travel Holdings is:

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

0.065 = CN¥1.3b ÷ (CN¥30b - CN¥9.9b) (Based on the trailing twelve months to September 2023).

Thus, Tongcheng Travel Holdings has an ROCE of 6.5%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 3.8%.

See our latest analysis for Tongcheng Travel Holdings

In the above chart we have measured Tongcheng Travel Holdings' 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 report for Tongcheng Travel Holdings.

What Can We Tell From Tongcheng Travel Holdings' ROCE Trend?

We're delighted to see that Tongcheng Travel Holdings is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 6.5% on its capital. In addition to that, Tongcheng Travel Holdings is employing 74% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

What We Can Learn From Tongcheng Travel Holdings' ROCE

Overall, Tongcheng Travel Holdings gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has only returned 31% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

While Tongcheng Travel Holdings looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 780 is currently trading for a fair price.

While Tongcheng Travel Holdings 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.