Shareholders Would Enjoy A Repeat Of Travelzoo's (NASDAQ:TZOO) Recent Growth In Returns

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Travelzoo (NASDAQ:TZOO) we really liked what we saw.

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. The formula for this calculation on Travelzoo is:

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

0.38 = US$7.6m ÷ (US$67m - US$48m) (Based on the trailing twelve months to December 2022).

So, Travelzoo has an ROCE of 38%. In absolute terms that's a great return and it's even better than the Interactive Media and Services industry average of 7.3%.

Check out our latest analysis for Travelzoo

Above you can see how the current ROCE for Travelzoo 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 Travelzoo here for free.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Travelzoo. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 38%. The amount of capital employed has increased too, by 23%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Another thing to note, Travelzoo has a high ratio of current liabilities to total assets of 71%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Travelzoo's ROCE

In summary, it's great to see that Travelzoo can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Astute investors may have an opportunity here because the stock has declined 29% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to continue researching Travelzoo, you might be interested to know about the 2 warning signs that our analysis has discovered.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.