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What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after investigating Tourism Holdings (NZSE:THL), we don't think it's current trends fit the mold of a multi-bagger.
Understanding 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. To calculate this metric for Tourism Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.069 = NZ$95m ÷ (NZ$1.6b - NZ$216m) (Based on the trailing twelve months to December 2024).
So, Tourism Holdings has an ROCE of 6.9%. Even though it's in line with the industry average of 7.3%, it's still a low return by itself.
View our latest analysis for Tourism Holdings
Above you can see how the current ROCE for Tourism 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 Tourism Holdings .
What The Trend Of ROCE Can Tell Us
In terms of Tourism Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 9.8%, but since then they've fallen to 6.9%. However it looks like Tourism Holdings 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.
In Conclusion...
To conclude, we've found that Tourism Holdings is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 3.2% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.