Should We Be Excited About The Trends Of Returns At Tourism Holdings (NZSE:THL)?

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Tourism Holdings (NZSE:THL), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Tourism Holdings, this is the formula:

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

0.081 = NZ$47m ÷ (NZ$654m - NZ$69m) (Based on the trailing twelve months to June 2020).

Therefore, Tourism Holdings has an ROCE of 8.1%. In absolute terms, that's a low return but it's around the Transportation industry average of 6.7%.

See our latest analysis for Tourism Holdings

In the above chart we have measured Tourism Holdings' 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 Tourism Holdings here for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Tourism Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.1% from 12% five years ago. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Tourism Holdings' ROCE

To conclude, we've found that Tourism Holdings is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 54% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing, we've spotted 2 warning signs facing Tourism Holdings that you might find interesting.

While Tourism 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.

When trading Tourism Holdings or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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