Returns Are Gaining Momentum At Tianli Education International Holdings (HKG:1773)

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. 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 Tianli Education International Holdings (HKG:1773) and its trend of ROCE, 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. Analysts use this formula to calculate it for Tianli Education International Holdings:

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

0.075 = CN¥387m ÷ (CN¥7.4b - CN¥2.3b) (Based on the trailing twelve months to December 2020).

Therefore, Tianli Education International Holdings has an ROCE of 7.5%. Even though it's in line with the industry average of 7.3%, it's still a low return by itself.

View our latest analysis for Tianli Education International Holdings

Above you can see how the current ROCE for Tianli Education International Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Tianli Education International Holdings here for free.

The Trend Of ROCE

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 7.5%. The amount of capital employed has increased too, by 637%. So we're very much inspired by what we're seeing at Tianli Education International Holdings thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 30%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Tianli Education International Holdings has. Astute investors may have an opportunity here because the stock has declined 52% in the last year. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing, we've spotted 3 warning signs facing Tianli Education International Holdings that you might find interesting.

While Tianli Education International Holdings 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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