Here's What We Make Of S.C. Turism Felix's (BVB:TUFE) Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into S.C. Turism Felix (BVB:TUFE), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on S.C. Turism Felix is:

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

0.007 = RON1.4m ÷ (RON212m - RON16m) (Based on the trailing twelve months to December 2020).

Therefore, S.C. Turism Felix has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 5.5%.

See our latest analysis for S.C. Turism Felix

Historical performance is a great place to start when researching a stock so above you can see the gauge for S.C. Turism Felix's ROCE against it's prior returns. If you're interested in investigating S.C. Turism Felix's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For S.C. Turism Felix Tell Us?

There is reason to be cautious about S.C. Turism Felix, given the returns are trending downwards. About five years ago, returns on capital were 3.0%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on S.C. Turism Felix becoming one if things continue as they have.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. However the stock has delivered a 72% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing, we've spotted 2 warning signs facing S.C. Turism Felix that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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