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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at China Cultural Tourism and Agriculture Group (HKG:542) so let's look a bit deeper.

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. The formula for this calculation on China Cultural Tourism and Agriculture Group is:

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

0.018 = HK$37m ÷ (HK$3.4b - HK$1.3b) (Based on the trailing twelve months to December 2023).

Thus, China Cultural Tourism and Agriculture Group has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 6.1%.

View our latest analysis for China Cultural Tourism and Agriculture Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of China Cultural Tourism and Agriculture Group.

What The Trend Of ROCE Can Tell Us

We're delighted to see that China Cultural Tourism and Agriculture Group is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 1.8% on its capital. And unsurprisingly, like most companies trying to break into the black, China Cultural Tourism and Agriculture Group is utilizing 68% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 38% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Key Takeaway

Long story short, we're delighted to see that China Cultural Tourism and Agriculture Group's reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 53% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

China Cultural Tourism and Agriculture Group does have some risks, we noticed 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

While China Cultural Tourism and Agriculture Group 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.