Tourism Holdings (NZSE:THL) Is Reinvesting At Lower Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Tourism Holdings (NZSE:THL), it didn't seem to tick all of these boxes.

What is 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. Analysts use this formula to calculate it for Tourism Holdings:

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

0.029 = NZ$13m ÷ (NZ$517m - NZ$74m) (Based on the trailing twelve months to December 2020).

Thus, Tourism Holdings has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Transportation industry average of 7.4%.

Check out our latest analysis for Tourism Holdings

Above you can see how the current ROCE for Tourism Holdings 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 report for Tourism Holdings.

The Trend Of ROCE

In terms of Tourism Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.9% from 13% 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 may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Tourism Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Tourism Holdings' reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 14% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Tourism Holdings does have some risks though, and we've spotted 3 warning signs for Tourism Holdings that you might be interested in.

While Tourism Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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