Our Take On The Returns On Capital At Tu Yi Holding (HKG:1701)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. In light of that, when we looked at Tu Yi Holding (HKG:1701) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Tu Yi Holding is:

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).

Thus, Tu Yi Holding has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 3.3%.

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 want to delve into the historical earnings, revenue and cash flow of Tu Yi Holding, check out these free graphs here.

The Trend Of ROCE

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. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Tu Yi Holding has decreased its current liabilities to 5.5% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Tu Yi Holding's ROCE

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. Unsurprisingly then, the stock has dived 88% over the last year, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Tu Yi Holding does have some risks, we noticed 6 warning signs (and 1 which is concerning) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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