There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount 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. Although, when we looked at Travel + Leisure (NYSE:TNL), it didn’t seem to tick all of these boxes.
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 Travel + Leisure is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.13 = US$758m ÷ (US$7.0b – US$1.2b) (Based on the trailing twelve months to March 2024).
Therefore, Travel + Leisure has an ROCE of 13%. In absolute terms, that’s a satisfactory return, but compared to the Hospitality industry average of 10% it’s much better.
See our latest analysis for Travel + Leisure
In the above chart we have measured Travel + Leisure’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 analyst report for Travel + Leisure .
Over the past five years, Travel + Leisure’s ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they’re past the growth phase. So don’t be surprised if Travel + Leisure doesn’t end up being a multi-bagger in a few years time.
In a nutshell, Travel + Leisure has been trudging along with the same returns from the same amount of capital over the last five years. Unsurprisingly, the stock has only gained 20% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you’re looking for a multi-bagger, we’d propose looking at other options.
Travel + Leisure does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant…
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.
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