Returns At Tiangong International (HKG:826) Appear To Be Weighed Down

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. In light of that, when we looked at Tiangong International (HKG:826) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Tiangong International:

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

0.062 = CN¥512m ÷ (CN¥13b - CN¥5.1b) (Based on the trailing twelve months to December 2022).

So, Tiangong International has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 8.3%.

Check out our latest analysis for Tiangong International

In the above chart we have measured Tiangong International's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Tiangong International.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Tiangong International in recent years. The company has employed 59% more capital in the last five years, and the returns on that capital have remained stable at 6.2%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Key Takeaway

Long story short, while Tiangong International has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 43% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Tiangong International could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Tiangong International 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. 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.