There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Tourism Holdings (NZSE:THL) 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)

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 Tourism Holdings is:

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

0.095 = NZ$111m ÷ (NZ$1.5b - NZ$322m) (Based on the trailing twelve months to June 2024).

Thus, Tourism Holdings has an ROCE of 9.5%. In absolute terms, that's a low return, but it's much better than the Transportation industry average of 7.1%.

View our latest analysis for Tourism Holdings

In the above chart we have measured Tourism Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Tourism Holdings for free.

What Does the ROCE Trend For Tourism Holdings Tell Us?

On the surface, the trend of ROCE at Tourism Holdings doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 9.5%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Tourism Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Tourism Holdings is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 28% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing: We've identified 3 warning signs with Tourism Holdings (at least 1 which can't be ignored) , and understanding these would certainly be useful.

While Tourism Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.