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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over Tourism Holdings' (NZSE:THL) trend of ROCE, we liked what we saw.
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. The formula for this calculation on Tourism Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = NZ$121m ÷ (NZ$1.4b - NZ$277m) (Based on the trailing twelve months to December 2023).
So, Tourism Holdings has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.9% generated by the Transportation industry.
View our latest analysis for Tourism Holdings
In the above chart we have measured Tourism Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Tourism Holdings for free.
So How Is Tourism Holdings' ROCE Trending?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 128% more capital in the last five years, and the returns on that capital have remained stable at 11%. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The Bottom Line On Tourism Holdings' ROCE
To sum it up, Tourism Holdings has simply been reinvesting capital steadily, at those decent rates of return. Yet over the last five years the stock has declined 46%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.
Tourism Holdings does have some risks, we noticed 4 warning signs (and 3 which can't be ignored) we think you should know about.
While Tourism 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.