Returns On Capital At Tongding Interconnection Information (SZSE:002491) Have Hit The Brakes

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Tongding Interconnection Information (SZSE:002491) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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 Tongding Interconnection Information, this is the formula:

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

0.056 = CN¥143m ÷ (CN¥5.8b - CN¥3.2b) (Based on the trailing twelve months to September 2024).

Thus, Tongding Interconnection Information has an ROCE of 5.6%. On its own that's a low return, but compared to the average of 4.1% generated by the Communications industry, it's much better.

See our latest analysis for Tongding Interconnection Information

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tongding Interconnection Information's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Tongding Interconnection Information.

What Can We Tell From Tongding Interconnection Information's ROCE Trend?

Over the past five years, Tongding Interconnection Information's ROCE has remained relatively flat while the business is using 56% less capital than before. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 56% of total assets, this reported ROCE would probably be less than5.6% because total capital employed would be higher.The 5.6% ROCE could be even lower if current liabilities weren't 56% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

What We Can Learn From Tongding Interconnection Information's ROCE

In summary, Tongding Interconnection Information isn't reinvesting funds back into the business and returns aren't growing. Since the stock has declined 14% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Tongding Interconnection Information does have some risks though, and we've spotted 2 warning signs for Tongding Interconnection Information that you might be interested in.

While Tongding Interconnection Information may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.