trivago (NASDAQ:TRVG) Is Doing The Right Things To Multiply Its Share Price
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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, trivago (NASDAQ:TRVG) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for trivago, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = €53m ÷ (€519m - €231m) (Based on the trailing twelve months to September 2023).
Therefore, trivago has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 6.8% generated by the Interactive Media and Services industry.
Check out our latest analysis for trivago
Above you can see how the current ROCE for trivago compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering trivago here for free.
What Can We Tell From trivago's ROCE Trend?
Like most people, we're pleased that trivago is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 18% on their capital employed. In regards to capital employed, trivago is using 71% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. trivago could be selling under-performing assets since the ROCE is improving.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 45% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.
Our Take On trivago's ROCE
In summary, it's great to see that trivago has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has dived 82% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.
Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.
While trivago 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.
