Return Trends At China Tianbao Group Development (HKG:1427) Aren't Appealing

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. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating China Tianbao Group Development (HKG:1427), 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 China Tianbao Group Development:

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

0.081 = CN¥125m ÷ (CN¥6.1b - CN¥4.5b) (Based on the trailing twelve months to December 2023).

So, China Tianbao Group Development has an ROCE of 8.1%. In absolute terms, that's a low return but it's around the Construction industry average of 7.4%.

View our latest analysis for China Tianbao Group Development

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Tianbao Group Development's ROCE against it's prior returns. If you're interested in investigating China Tianbao Group Development's past further, check out this free graph covering China Tianbao Group Development's past earnings, revenue and cash flow.

So How Is China Tianbao Group Development's ROCE Trending?

Over the past five years, China Tianbao Group Development's ROCE has remained relatively flat while the business is using 28% less capital than before. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. In addition to that, since the ROCE doesn't scream "quality" at 8.1%, it's hard to get excited about these developments.

On a side note, China Tianbao Group Development's current liabilities are still rather high at 75% of total assets. 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.

In Conclusion...

Overall, we're not ecstatic to see China Tianbao Group Development reducing the amount of capital it employs in the business. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 94% over the last three years. Therefore based on the analysis done in this article, we don't think China Tianbao Group Development has the makings of a multi-bagger.

One final note, you should learn about the 4 warning signs we've spotted with China Tianbao Group Development (including 2 which shouldn't be ignored) .

While China Tianbao Group Development isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com