Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at China Tourism Group Duty Free (SHSE:601888) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Tourism Group Duty Free, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.091 = CN¥5.1b ÷ (CN¥70b - CN¥14b) (Based on the trailing twelve months to September 2022).

Therefore, China Tourism Group Duty Free has an ROCE of 9.1%. On its own that's a low return, but compared to the average of 6.8% generated by the Specialty Retail industry, it's much better.

Check out our latest analysis for China Tourism Group Duty Free

In the above chart we have measured China Tourism Group Duty Free's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for China Tourism Group Duty Free.

What Does the ROCE Trend For China Tourism Group Duty Free Tell Us?

In terms of China Tourism Group Duty Free's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 21%, but since then they've fallen to 9.1%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On China Tourism Group Duty Free's ROCE

We're a bit apprehensive about China Tourism Group Duty Free because despite more capital being deployed in the business, returns on that capital and sales have both fallen. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 383%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

China Tourism Group Duty Free does have some risks, we noticed 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.