Be Wary Of Orange Tour Cultural Holding (HKG:8627) And Its Returns On Capital

What are the early trends we should look for to identify a stock that could 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. However, after investigating Orange Tour Cultural Holding (HKG:8627), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Orange Tour Cultural Holding, this is the formula:

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

0.034 = CN¥3.0m ÷ (CN¥106m - CN¥18m) (Based on the trailing twelve months to December 2023).

Therefore, Orange Tour Cultural Holding has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Media industry average of 9.0%.

Check out our latest analysis for Orange Tour Cultural Holding

Historical performance is a great place to start when researching a stock so above you can see the gauge for Orange Tour Cultural Holding's ROCE against it's prior returns. If you'd like to look at how Orange Tour Cultural Holding has performed in the past in other metrics, you can view this free graph of Orange Tour Cultural Holding's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Orange Tour Cultural Holding, we didn't gain much confidence. To be more specific, ROCE has fallen from 43% over the last five years. 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.

Our Take On Orange Tour Cultural Holding's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Orange Tour Cultural Holding. Despite these promising trends, the stock has collapsed 73% over the last three years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

If you want to know some of the risks facing Orange Tour Cultural Holding we've found 4 warning signs (2 are potentially serious!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com