What Do The Returns At Tingyi (Cayman Islands) Holding (HKG:322) Mean Going Forward?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So when we looked at Tingyi (Cayman Islands) Holding (HKG:322) 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 Tingyi (Cayman Islands) Holding:

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

0.18 = CN¥4.9b ÷ (CN¥64b - CN¥36b) (Based on the trailing twelve months to June 2020).

Therefore, Tingyi (Cayman Islands) Holding has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 14% it's much better.

Check out 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'd like, you can check out the forecasts from the analysts covering Tingyi (Cayman Islands) Holding here for free.

What The Trend Of ROCE Can Tell Us

Tingyi (Cayman Islands) Holding has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 54% in that same time. 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. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 56% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Tingyi (Cayman Islands) Holding's ROCE

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 76% return over the last five years. 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.

One more thing, we've spotted 2 warning signs facing Tingyi (Cayman Islands) Holding that you might find interesting.

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.

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