Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. So when we looked at Tongcheng Travel Holdings (HKG:780) and its trend of ROCE, we really liked what we saw.

Understanding 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 Tongcheng Travel Holdings, this is the formula:

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

0.088 = CN¥2.1b ÷ (CN¥37b - CN¥13b) (Based on the trailing twelve months to September 2024).

So, Tongcheng Travel Holdings has an ROCE of 8.8%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 6.9%.

Above you can see how the current ROCE for Tongcheng Travel Holdings 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 analyst report for Tongcheng Travel Holdings .

What Does the ROCE Trend For Tongcheng Travel Holdings Tell Us?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.8%. Basically the business is earning more per dollar of capital invested and in addition to that, 77% more capital is being employed now too. So we're very much inspired by what we're seeing at Tongcheng Travel Holdings thanks to its ability to profitably reinvest capital.

The Bottom Line

To sum it up, Tongcheng Travel Holdings has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 57% return over the last five years. In light of that, we think it's worth looking further into this stock because if Tongcheng Travel Holdings can keep these trends up, it could have a bright future ahead.

Tongcheng Travel Holdings does have some risks though, and we've spotted 1 warning sign for Tongcheng Travel Holdings that you might be interested in.

While Tongcheng Travel Holdings 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.

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