There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 China Cultural Tourism and Agriculture Group (HKG:542) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for China Cultural Tourism and Agriculture Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.024 = HK$47m ÷ (HK$3.4b - HK$1.3b) (Based on the trailing twelve months to June 2024).
So, China Cultural Tourism and Agriculture Group has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 7.1%.
See our latest analysis for China Cultural Tourism and Agriculture Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for China Cultural Tourism and Agriculture Group's ROCE against it's prior returns. If you're interested in investigating China Cultural Tourism and Agriculture Group's past further, check out this free graph covering China Cultural Tourism and Agriculture Group's past earnings, revenue and cash flow.
The Trend Of ROCE
The fact that China Cultural Tourism and Agriculture Group is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 2.4% which is a sight for sore eyes. In addition to that, China Cultural Tourism and Agriculture Group is employing 67% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
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 40% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.
Our Take On China Cultural Tourism and Agriculture Group's ROCE
Overall, China Cultural Tourism and Agriculture Group gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. However the stock is down a substantial 75% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.
If you want to know some of the risks facing China Cultural Tourism and Agriculture Group we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.
While China Cultural Tourism and Agriculture Group 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.