Capital Allocation Trends At Tianneng Power International (HKG:819) Aren't Ideal

There are a few key trends to look for if we want to identify the next 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Tianneng Power International (HKG:819) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. The formula for this calculation on Tianneng Power International is:

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

0.065 = CN¥1.2b ÷ (CN¥40b - CN¥22b) (Based on the trailing twelve months to June 2022).

So, Tianneng Power International has an ROCE of 6.5%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 3.9%.

Our analysis indicates that 819 is potentially undervalued!

Above you can see how the current ROCE for Tianneng Power International compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Tianneng Power International.

What Can We Tell From Tianneng Power International's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 23% five years ago, while capital employed has grown 248%. That being said, Tianneng Power International raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Tianneng Power International probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

Another thing to note, Tianneng Power International has a high ratio of current liabilities to total assets of 54%. 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 Tianneng Power International's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Tianneng Power International is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 48% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you want to continue researching Tianneng Power International, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.