We're Watching These Trends At Ten Pao Group Holdings (HKG:1979)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So when we looked at Ten Pao Group Holdings (HKG:1979), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

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. 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)

0.25 = HK$242m ÷ (HK$2.4b - HK$1.5b) (Based on the trailing twelve months to June 2020).

So, Ten Pao Group Holdings has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Electrical industry average of 8.7%.

Check out our latest analysis for Ten Pao Group Holdings

In the above chart we have measured Ten Pao Group Holdings' 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 Ten Pao Group Holdings here for free.

So How Is Ten Pao Group Holdings' ROCE Trending?

When we looked at the ROCE trend at Ten Pao Group Holdings, we didn't gain much confidence. While it's comforting that the ROCE is high, five years ago it was 38%. However it looks like Ten Pao Group Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a separate but related note, it's important to know that Ten Pao Group Holdings has a current liabilities to total assets ratio of 61%, which we'd consider pretty high. 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 Key Takeaway

In summary, Ten Pao Group Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 368% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to continue researching Ten Pao Group Holdings, you might be interested to know about the 3 warning signs that our analysis has discovered.

Ten Pao Group Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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