Stock Analysis

Returns On Capital Signal Tricky Times Ahead For Tianyun International Holdings (HKG:6836)

SEHK:6836
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There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Tianyun International Holdings (HKG:6836) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Tianyun International Holdings is:

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

0.18 = CN¥183m ÷ (CN¥1.4b - CN¥343m) (Based on the trailing twelve months to December 2020).

So, Tianyun International Holdings has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 13% generated by the Food industry.

Check out our latest analysis for Tianyun International Holdings

roce
SEHK:6836 Return on Capital Employed April 14th 2021

Above you can see how the current ROCE for Tianyun 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 Tianyun International Holdings here for free.

The Trend Of ROCE

When we looked at the ROCE trend at Tianyun International Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 18% from 31% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Tianyun International Holdings' ROCE

In summary, we're somewhat concerned by Tianyun International Holdings' diminishing returns on increasing amounts of capital. Since the stock has skyrocketed 101% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

While Tianyun International Holdings doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. 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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