If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Changbai Mountain Tourism's (SHSE:603099) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Changbai Mountain Tourism is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = CN¥147m ÷ (CN¥1.3b - CN¥133m) (Based on the trailing twelve months to September 2023).
Thus, Changbai Mountain Tourism has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 8.4% it's much better.
Above you can see how the current ROCE for Changbai Mountain Tourism 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 Changbai Mountain Tourism .
So How Is Changbai Mountain Tourism's ROCE Trending?
Changbai Mountain Tourism is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 46% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Bottom Line
To sum it up, Changbai Mountain Tourism is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 152% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Changbai Mountain Tourism can keep these trends up, it could have a bright future ahead.
On a separate note, we've found 1 warning sign for Changbai Mountain Tourism you'll probably want to know about.
While Changbai Mountain Tourism 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.