Investors Will Want Trip.com Group's (NASDAQ:TCOM) Growth In ROCE To Persist

What trends should we look for it we want to identify stocks that can 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Trip.com Group's (NASDAQ:TCOM) returns on capital, so let's have a look.

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 Trip.com Group:

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

0.06 = CN¥8.9b ÷ (CN¥228b - CN¥80b) (Based on the trailing twelve months to September 2023).

Thus, Trip.com Group has an ROCE of 6.0%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.2%.

See our latest analysis for Trip.com Group

Above you can see how the current ROCE for Trip.com Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Trip.com Group here for free.

What Does the ROCE Trend For Trip.com Group Tell Us?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 6.0%. The amount of capital employed has increased too, by 23%. So we're very much inspired by what we're seeing at Trip.com Group thanks to its ability to profitably reinvest capital.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Trip.com Group has. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 14% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Trip.com Group does have some risks though, and we've spotted 1 warning sign for Trip.com Group that you might be interested in.

While Trip.com Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.