Tai Ping Carpets International (HKG:146) Shareholders Will Want The ROCE Trajectory To Continue

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Tai Ping Carpets International's (HKG:146) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Tai Ping Carpets International:

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

0.058 = HK$30m ÷ (HK$788m - HK$271m) (Based on the trailing twelve months to June 2022).

So, Tai Ping Carpets International has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 11%.

View our latest analysis for Tai Ping Carpets International

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

How Are Returns Trending?

We're delighted to see that Tai Ping Carpets International is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 5.8% on their capital employed. In regards to capital employed, Tai Ping Carpets International is using 21% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

One more thing to note, Tai Ping Carpets International has decreased current liabilities to 34% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Key Takeaway

In summary, it's great to see that Tai Ping Carpets International has been able to turn things around and earn higher returns on lower amounts of capital. Given the stock has declined 47% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

Like most companies, Tai Ping Carpets International does come with some risks, and we've found 2 warning signs that you should be aware of.

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.