We Like These Underlying Return On Capital Trends At Tsingtao Brewery (HKG:168)

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 Tsingtao Brewery's (HKG:168) returns on capital, so let's have a look.

What is 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 Tsingtao Brewery is:

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

0.099 = CN¥2.9b ÷ (CN¥47b - CN¥18b) (Based on the trailing twelve months to March 2022).

So, Tsingtao Brewery has an ROCE of 9.9%. Even though it's in line with the industry average of 10.0%, it's still a low return by itself.

Check out our latest analysis for Tsingtao Brewery

In the above chart we have measured Tsingtao Brewery's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Tsingtao Brewery here for free.

What Can We Tell From Tsingtao Brewery's ROCE Trend?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 9.9%. The amount of capital employed has increased too, by 44%. So we're very much inspired by what we're seeing at Tsingtao Brewery thanks to its ability to profitably reinvest capital.

The Bottom Line On Tsingtao Brewery's ROCE

In summary, it's great to see that Tsingtao Brewery can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 133% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know about the risks facing Tsingtao Brewery, we've discovered 1 warning sign that you should be aware of.

While Tsingtao Brewery may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.