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To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So when we looked at Trip.com Group (NASDAQ:TCOM) 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. To calculate this metric for Trip.com Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.084 = CN¥14b ÷ (CN¥243b - CN¥74b) (Based on the trailing twelve months to December 2024).
Therefore, Trip.com Group has an ROCE of 8.4%. In absolute terms, that's a low return but it's around the Hospitality industry average of 10.0%.
Check out our latest analysis for Trip.com Group
Above you can see how the current ROCE for Trip.com Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Trip.com Group for free.
What Can We Tell From Trip.com Group's ROCE Trend?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 8.4%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 29%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Bottom Line On Trip.com Group's ROCE
All in all, it's terrific to see that Trip.com Group is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 139% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Trip.com Group can keep these trends up, it could have a bright future ahead.