A Look Into Ten Pao Group Holdings' (HKG:1979) Impressive Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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, the ROCE of Ten Pao Group Holdings (HKG:1979) looks attractive right now, so lets see what the trend of returns can tell us.

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 Ten Pao Group Holdings is:

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

0.28 = HK$236m ÷ (HK$2.2b - HK$1.4b) (Based on the trailing twelve months to December 2019).

Thus, Ten Pao Group Holdings has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Electrical industry average of 8.4%.

See our latest analysis for Ten Pao Group Holdings

In the above chart we have a measured Ten Pao Group Holdings' 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 report for Ten Pao Group Holdings.

What Can We Tell From Ten Pao Group Holdings' ROCE Trend?

It's hard not to be impressed by Ten Pao Group Holdings' returns on capital. Over the past five years, ROCE has remained relatively flat at around 28% and the business has deployed 71% more capital into its operations. Returns like this are the envy of most businesses and given they have repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.

On a separate but related note, it's important to know that Ten Pao Group Holdings has a current liabilities to total assets ratio of 63%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Ten Pao Group Holdings' ROCE

Ten Pao Group Holdings has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. Yet over the last three years the stock has declined 65%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Ten Pao Group Holdings (of which 1 is concerning!) that you should know about.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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This article by Simply Wall St is general in nature. 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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