Tingyi (Cayman Islands) Holding's (HKG:322) Returns On Capital Are Heading Higher

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Speaking of which, we noticed some great changes in Tingyi (Cayman Islands) Holding's (HKG:322) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Tingyi (Cayman Islands) Holding is:

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

0.14 = CN¥4.5b ÷ (CN¥66b - CN¥33b) (Based on the trailing twelve months to June 2021).

Thus, Tingyi (Cayman Islands) Holding has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 11% it's much better.

See our latest analysis for Tingyi (Cayman Islands) Holding

In the above chart we have measured Tingyi (Cayman Islands) Holding's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Tingyi (Cayman Islands) Holding Tell Us?

Tingyi (Cayman Islands) Holding's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 191% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a separate but related note, it's important to know that Tingyi (Cayman Islands) Holding has a current liabilities to total assets ratio of 49%, which we'd consider pretty high. 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.

In Conclusion...

To sum it up, Tingyi (Cayman Islands) Holding is collecting higher returns from the same amount of capital, and that's impressive. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 100% return over the last five years. In light of that, we think it's worth looking further into this stock because if Tingyi (Cayman Islands) Holding can keep these trends up, it could have a bright future ahead.

If you want to continue researching Tingyi (Cayman Islands) Holding, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Tingyi (Cayman Islands) 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.

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.

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