Be Wary Of Tat Hong Equipment Service (HKG:2153) And Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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 Tat Hong Equipment Service (HKG:2153) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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 Tat Hong Equipment Service is:

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

0.032 = CN¥70m ÷ (CN¥2.9b - CN¥741m) (Based on the trailing twelve months to March 2022).

Therefore, Tat Hong Equipment Service has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Construction industry average of 7.3%.

View our latest analysis for Tat Hong Equipment Service

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Tat Hong Equipment Service has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Tat Hong Equipment Service's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 4.8%, but since then they've fallen to 3.2%. However it looks like Tat Hong Equipment Service 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.

What We Can Learn From Tat Hong Equipment Service's ROCE

In summary, Tat Hong Equipment Service is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 14% in the last year. Therefore based on the analysis done in this article, we don't think Tat Hong Equipment Service has the makings of a multi-bagger.

One more thing, we've spotted 1 warning sign facing Tat Hong Equipment Service that you might find interesting.

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.