There Are Reasons To Feel Uneasy About Tianli International Holdings' (HKG:1773) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Tianli International Holdings (HKG:1773), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Tianli International Holdings is:

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

0.073 = CN¥360m ÷ (CN¥8.5b - CN¥3.6b) (Based on the trailing twelve months to February 2023).

Therefore, Tianli International Holdings has an ROCE of 7.3%. On its own, that's a low figure but it's around the 8.3% average generated by the Consumer Services industry.

View our latest analysis for Tianli International Holdings

Above you can see how the current ROCE for Tianli International Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

SWOT Analysis for Tianli International Holdings

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Tianli International Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.3% from 11% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Another thing to note, Tianli International Holdings has a high ratio of current liabilities to total assets of 42%. 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.

Our Take On Tianli International Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Tianli International Holdings is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 46% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about Tianli International Holdings, we've spotted 2 warning signs, and 1 of them is concerning.

While Tianli 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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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.