Tongguan Gold Group's (HKG:340) Returns On Capital Are Heading Higher

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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, Tongguan Gold Group (HKG:340) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Tongguan Gold Group is:

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

0.047 = HK$144m ÷ (HK$3.8b - HK$708m) (Based on the trailing twelve months to June 2022).

So, Tongguan Gold Group has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 14%.

View our latest analysis for Tongguan Gold Group

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're interested in investigating Tongguan Gold Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Tongguan Gold Group's ROCE Trend?

The fact that Tongguan Gold Group is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 4.7% which is a sight for sore eyes. Not only that, but the company is utilizing 105% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

Our Take On Tongguan Gold Group's ROCE

Long story short, we're delighted to see that Tongguan Gold Group's reinvestment activities have paid off and the company is now profitable. Given the stock has declined 44% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we've found 1 warning sign for Tongguan Gold Group that we think you should be aware of.

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.

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.