What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. 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 S.C. Turism Felix (BVB:TUFE), 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 S.C. Turism Felix, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.038 = RON7.9m ÷ (RON238m - RON30m) (Based on the trailing twelve months to June 2020).
Therefore, S.C. Turism Felix has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 6.2%.
Check out our latest analysis for S.C. Turism Felix
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of S.C. Turism Felix, check out these free graphs here.
The Trend Of ROCE
Things have been pretty stable at S.C. Turism Felix, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if S.C. Turism Felix doesn't end up being a multi-bagger in a few years time.
The Bottom Line
In summary, S.C. Turism Felix isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 99% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
One more thing to note, we've identified 2 warning signs with S.C. Turism Felix and understanding these should be part of your investment process.
While S.C. Turism Felix 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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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.
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About BVB:TUFE
Low and overvalued.
