If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at China Tourism Group Duty Free (SHSE:601888), it didn't seem to tick all of these boxes.

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 China Tourism Group Duty Free:

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

0.11 = CN¥7.1b ÷ (CN¥80b - CN¥14b) (Based on the trailing twelve months to June 2024).

So, China Tourism Group Duty Free has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Specialty Retail industry average of 4.5% it's much better.

In the above chart we have measured China Tourism Group Duty Free's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for China Tourism Group Duty Free .

The Trend Of ROCE

When we looked at the ROCE trend at China Tourism Group Duty Free, we didn't gain much confidence. To be more specific, ROCE has fallen from 31% over the last five years. However it looks like China Tourism Group Duty Free might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On China Tourism Group Duty Free's ROCE

To conclude, we've found that China Tourism Group Duty Free is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 21% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think China Tourism Group Duty Free has the makings of a multi-bagger.

One more thing to note, we've identified 1 warning sign with China Tourism Group Duty Free and understanding it should be part of your investment process.

While China Tourism Group Duty Free 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com