Advertisement
Australia markets closed
  • ALL ORDS

    8,262.40
    +56.30 (+0.69%)
     
  • AUD/USD

    0.6782
    -0.0004 (-0.06%)
     
  • ASX 200

    8,017.60
    +58.30 (+0.73%)
     
  • OIL

    82.41
    +0.20 (+0.24%)
     
  • GOLD

    2,413.70
    -7.00 (-0.29%)
     
  • Bitcoin AUD

    92,667.04
    +3,832.83 (+4.31%)
     
  • CMC Crypto 200

    1,305.66
    +36.71 (+2.89%)
     

The Returns On Capital At Tripadvisor (NASDAQ:TRIP) Don't Inspire Confidence

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Tripadvisor (NASDAQ:TRIP), we've spotted some signs that it could be struggling, so let's investigate.

Understanding 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. The formula for this calculation on Tripadvisor is:

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

0.084 = US$155m ÷ (US$2.7b - US$892m) (Based on the trailing twelve months to March 2024).

ADVERTISEMENT

Therefore, Tripadvisor has an ROCE of 8.4%. On its own that's a low return, but compared to the average of 6.4% generated by the Interactive Media and Services industry, it's much better.

Check out our latest analysis for Tripadvisor

roce
roce

Above you can see how the current ROCE for Tripadvisor compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Tripadvisor .

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Tripadvisor. About five years ago, returns on capital were 11%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Tripadvisor to turn into a multi-bagger.

On a side note, Tripadvisor's current liabilities have increased over the last five years to 33% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line On Tripadvisor's ROCE

In summary, it's unfortunate that Tripadvisor is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 56% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

While Tripadvisor doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for TRIP on our platform.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.