Is There More Growth In Store For China Tianrui Group Cement's (HKG:1252) Returns On Capital?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, we've noticed some promising trends at China Tianrui Group Cement (HKG:1252) so let's look a bit deeper.

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 China Tianrui Group Cement is:

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

0.17 = CN¥3.3b ÷ (CN¥31b - CN¥12b) (Based on the trailing twelve months to June 2020).

So, China Tianrui Group Cement has an ROCE of 17%. That's a relatively normal return on capital, and it's around the 16% generated by the Basic Materials industry.

See our latest analysis for China Tianrui Group Cement

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how China Tianrui Group Cement has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From China Tianrui Group Cement's ROCE Trend?

We like the trends that we're seeing from China Tianrui Group Cement. The data shows that returns on capital have increased substantially over the last five years to 17%. The amount of capital employed has increased too, by 65%. So we're very much inspired by what we're seeing at China Tianrui Group Cement thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 38%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

In Conclusion...

All in all, it's terrific to see that China Tianrui Group Cement is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if China Tianrui Group Cement can keep these trends up, it could have a bright future ahead.

China Tianrui Group Cement does have some risks though, and we've spotted 1 warning sign for China Tianrui Group Cement that you might be interested in.

While China Tianrui Group Cement 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. 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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