Returns At China Tangshang Holdings (HKG:674) Are On The Way Up

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at China Tangshang Holdings (HKG:674) so let's look a bit deeper.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for China Tangshang Holdings, this is the formula:

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

0.011 = HK$12m ÷ (HK$2.2b - HK$1.1b) (Based on the trailing twelve months to September 2021).

Thus, China Tangshang Holdings has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 8.8%.

View our latest analysis for China Tangshang Holdings

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 want to delve into the historical earnings, revenue and cash flow of China Tangshang Holdings, check out these free graphs here.

The Trend Of ROCE

China Tangshang Holdings has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 1.1% on its capital. Not only that, but the company is utilizing 411% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a side note, China Tangshang Holdings' current liabilities are still rather high at 50% 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.

What We Can Learn From China Tangshang Holdings' ROCE

Long story short, we're delighted to see that China Tangshang Holdings' reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 55% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

China Tangshang Holdings does have some risks though, and we've spotted 2 warning signs for China Tangshang Holdings that you might be interested in.

While China Tangshang Holdings 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.