Here's What's Concerning About Tongqinglou Catering's (SHSE:605108) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Tongqinglou Catering (SHSE:605108), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Tongqinglou Catering:

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

0.12 = CN¥395m ÷ (CN¥4.5b - CN¥1.1b) (Based on the trailing twelve months to March 2024).

So, Tongqinglou Catering has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 8.6% it's much better.

Check out our latest analysis for Tongqinglou Catering

In the above chart we have measured Tongqinglou Catering's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Tongqinglou Catering for free.

So How Is Tongqinglou Catering's ROCE Trending?

On the surface, the trend of ROCE at Tongqinglou Catering doesn't inspire confidence. Around five years ago the returns on capital were 30%, but since then they've fallen to 12%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Tongqinglou Catering's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Tongqinglou Catering. Furthermore the stock has climbed 45% over the last three years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to continue researching Tongqinglou Catering, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.

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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.