Tripadvisor (NASDAQ:TRIP) Will Be Looking To Turn Around Its Returns

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Tripadvisor (NASDAQ:TRIP), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Tripadvisor, this is the formula:

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

0.056 = US$107m ÷ (US$2.7b - US$763m) (Based on the trailing twelve months to March 2023).

So, Tripadvisor has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Interactive Media and Services industry average of 8.3%.

View our latest analysis for Tripadvisor

Above you can see how the current ROCE for Tripadvisor 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 Tripadvisor.

So How Is Tripadvisor's ROCE Trending?

There is reason to be cautious about Tripadvisor, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 7.0% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Tripadvisor becoming one if things continue as they have.

Our Take On Tripadvisor's ROCE

In summary, it's unfortunate that Tripadvisor is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 62% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you're still interested in Tripadvisor it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Tripadvisor 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. 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.