Returns On Capital Are A Standout For China Tangshang Holdings (HKG:674)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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 the ROCE trend of China Tangshang Holdings (HKG:674) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.20 = HK$200m ÷ (HK$1.4b - HK$401m) (Based on the trailing twelve months to September 2022).

So, China Tangshang Holdings has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Commercial Services industry average of 7.5%.

Check out our latest analysis for China Tangshang Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Tangshang Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of China Tangshang Holdings, check out these free graphs here.

SWOT Analysis for China Tangshang Holdings

How Are Returns Trending?

We're delighted to see that China Tangshang Holdings is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 20% which is a sight for sore eyes. Not only that, but the company is utilizing 557% 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 related note, the company's ratio of current liabilities to total assets has decreased to 29%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

What We Can Learn From China Tangshang Holdings' ROCE

In summary, it's great to see that China Tangshang Holdings has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 35% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing to note, we've identified 4 warning signs with China Tangshang Holdings and understanding them should be part of your investment process.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.