Tian Chang Group Holdings (HKG:2182) Might Have The Makings Of A Multi-Bagger

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So on that note, Tian Chang Group Holdings (HKG:2182) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Tian Chang Group Holdings, this is the formula:

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

0.12 = HK$88m ÷ (HK$1.2b - HK$456m) (Based on the trailing twelve months to December 2020).

Therefore, Tian Chang Group Holdings has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 9.5% it's much better.

View our latest analysis for Tian Chang Group Holdings

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 Tian Chang Group Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Tian Chang Group Holdings' ROCE Trending?

The trends we've noticed at Tian Chang Group Holdings are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 12%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 87%. So we're very much inspired by what we're seeing at Tian Chang Group Holdings thanks to its ability to profitably reinvest capital.

The Bottom Line

To sum it up, Tian Chang Group Holdings has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 28% awarded to those who held the stock over the last three years, you could argue that these developments are starting to get the attention they deserve. 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.

Tian Chang Group Holdings does have some risks though, and we've spotted 3 warning signs for Tian Chang Group Holdings that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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