Here's What's Concerning About Tianrun Industry Technology's (SZSE:002283) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Tianrun Industry Technology (SZSE:002283), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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 Tianrun Industry Technology is:

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

0.055 = CN¥344m ÷ (CN¥8.6b - CN¥2.4b) (Based on the trailing twelve months to September 2024).

Thus, Tianrun Industry Technology has an ROCE of 5.5%. In absolute terms, that's a low return but it's around the Machinery industry average of 5.2%.

View our latest analysis for Tianrun Industry Technology

Above you can see how the current ROCE for Tianrun Industry Technology 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 Tianrun Industry Technology for free.

How Are Returns Trending?

When we looked at the ROCE trend at Tianrun Industry Technology, we didn't gain much confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 5.5%. However it looks like Tianrun Industry Technology might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

To conclude, we've found that Tianrun Industry Technology is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 62% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 1 warning sign for Tianrun Industry Technology that we think you should be aware of.

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.