Has Tu Yi Holding (HKG:1701) Got What It Takes To Become A Multi-Bagger?

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. However, after briefly looking over the numbers, we don't think Tu Yi Holding (HKG:1701) 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. Analysts use this formula to calculate it for Tu Yi Holding:

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

0.0018 = CN¥565k ÷ (CN¥323m - CN¥18m) (Based on the trailing twelve months to June 2020).

Therefore, Tu Yi Holding has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 3.8%.

View our latest analysis for Tu Yi Holding

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tu Yi Holding's ROCE against it's prior returns. If you'd like to look at how Tu Yi Holding has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Tu Yi Holding's ROCE Trending?

When we looked at the ROCE trend at Tu Yi Holding, we didn't gain much confidence. Over the last three years, returns on capital have decreased to 0.2% from 20% three years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Tu Yi Holding has decreased its current liabilities to 5.5% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

We're a bit apprehensive about Tu Yi Holding because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 52% over the last year, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 6 warning signs with Tu Yi Holding (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

While Tu Yi Holding 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. 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.
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