If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, China Cultural Tourism and Agriculture Group (HKG:542) looks quite promising in regards to its trends of return on capital.
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 China Cultural Tourism and Agriculture Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.018 = HK$37m ÷ (HK$3.4b - HK$1.3b) (Based on the trailing twelve months to December 2023).
Thus, China Cultural Tourism and Agriculture Group has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 6.2%.
See our latest analysis for China Cultural Tourism and Agriculture Group
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how China Cultural Tourism and Agriculture Group has performed in the past in other metrics, you can view this free graph of China Cultural Tourism and Agriculture Group's past earnings, revenue and cash flow.
So How Is China Cultural Tourism and Agriculture Group's ROCE Trending?
We're delighted to see that China Cultural Tourism and Agriculture Group is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 1.8% on its capital. In addition to that, China Cultural Tourism and Agriculture Group is employing 68% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 38% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
Our Take On China Cultural Tourism and Agriculture Group's ROCE
To the delight of most shareholders, China Cultural Tourism and Agriculture Group has now broken into profitability. And since the stock has fallen 37% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
If you want to know some of the risks facing China Cultural Tourism and Agriculture Group we've found 3 warning signs (2 can't be ignored!) that you should be aware of before investing here.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.