There's Been No Shortage Of Growth Recently For Tongguan Gold Group's (HKG:340) Returns On Capital

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Tongguan Gold Group's (HKG:340) 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. To calculate this metric for Tongguan Gold Group, this is the formula:

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

0.023 = HK$65m ÷ (HK$3.5b - HK$626m) (Based on the trailing twelve months to June 2023).

Thus, Tongguan Gold Group has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 8.4%.

See our latest analysis for Tongguan Gold Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tongguan Gold Group's ROCE against it's prior returns. If you'd like to look at how Tongguan Gold Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Tongguan Gold Group's ROCE Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 2.3%. The amount of capital employed has increased too, by 25%. So we're very much inspired by what we're seeing at Tongguan Gold Group thanks to its ability to profitably reinvest capital.

What We Can Learn From Tongguan Gold Group's ROCE

In summary, it's great to see that Tongguan Gold Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Astute investors may have an opportunity here because the stock has declined 26% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing to note, we've identified 3 warning signs with Tongguan Gold Group and understanding these should be part of your investment process.

While Tongguan Gold Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.