We Like These Underlying Return On Capital Trends At China Tangshang Holdings (HKG:674)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. 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?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for China Tangshang Holdings:

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

0.09 = HK$171m ÷ (HK$4.3b - HK$2.4b) (Based on the trailing twelve months to March 2023).

Thus, China Tangshang Holdings has an ROCE of 9.0%. On its own, that's a low figure but it's around the 8.2% average generated by the Commercial Services industry.

Check out 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.

What The Trend Of ROCE Can Tell Us

The fact that China Tangshang Holdings is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 9.0% which is a sight for sore eyes. Not only that, but the company is utilizing 1,222% 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 separate but related note, it's important to know that China Tangshang Holdings has a current liabilities to total assets ratio of 56%, which we'd consider pretty high. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On China Tangshang Holdings' ROCE

Overall, China Tangshang Holdings gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Given the stock has declined 34% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a separate note, we've found 3 warning signs for China Tangshang Holdings you'll probably want to know about.

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.