Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. So when we looked at Fosun Tourism Group (HKG:1992) and its trend of ROCE, we really liked what we saw.
What Is 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. Analysts use this formula to calculate it for Fosun Tourism Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.052 = CN¥1.3b ÷ (CN¥37b – CN¥12b) (Based on the trailing twelve months to June 2022).
So, Fosun Tourism Group has an ROCE of 5.2%. On its own that’s a low return, but compared to the average of 2.2% generated by the Hospitality industry, it’s much better.
See our latest analysis for Fosun Tourism Group
In the above chart we have measured Fosun Tourism Group’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Fosun Tourism Group Tell Us?
We’re delighted to see that Fosun Tourism Group is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it’s earning 5.2% which is a sight for sore eyes. Not only that, but the company is utilizing 107% more capital than before, but that’s to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
On a related note, the company’s ratio of current liabilities to total assets has decreased to 33%, which basically reduces it’s funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business’ underlying economics, which is great to see.
Our Take On Fosun Tourism Group’s ROCE
In summary, it’s great to see that Fosun Tourism Group has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a solid 31% to shareholders over the last three years, it’s fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On the other side of ROCE, we have to consider valuation. That’s why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.
While Fosun Tourism Group 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.
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