Ten Pao Group Holdings (HKG:1979) Might Become A Compounding Machine

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Ten Pao Group Holdings' (HKG:1979) trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Ten Pao Group Holdings is:

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

0.35 = HK$430m ÷ (HK$3.6b - HK$2.4b) (Based on the trailing twelve months to December 2020).

Therefore, Ten Pao Group Holdings has an ROCE of 35%. That's a fantastic return and not only that, it outpaces the average of 8.2% earned by companies in a similar industry.

Check out our latest analysis for Ten Pao Group Holdings

Above you can see how the current ROCE for Ten Pao Group Holdings 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 Ten Pao Group Holdings here for free.

What Does the ROCE Trend For Ten Pao Group Holdings Tell Us?

Ten Pao Group Holdings deserves to be commended in regards to it's returns. The company has employed 173% more capital in the last five years, and the returns on that capital have remained stable at 35%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Ten Pao Group Holdings can keep this up, we'd be very optimistic about its future.

On a side note, Ten Pao Group Holdings' current liabilities are still rather high at 66% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In short, we'd argue Ten Pao Group Holdings has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 261% return to those who've held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you want to continue researching Ten Pao Group Holdings, you might be interested to know about the 1 warning sign that our analysis has discovered.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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