Slowing Rates Of Return At Tiangong International (HKG:826) Leave Little Room For Excitement

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Tiangong International (HKG:826) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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 Tiangong International, this is the formula:

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).

Therefore, Tiangong International has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 8.3%.

View our latest analysis for Tiangong International

Above you can see how the current ROCE for Tiangong International compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Tiangong International here for free.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Tiangong International. The company has consistently earned 6.2% for the last five years, and the capital employed within the business has risen 59% in that time. 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 Bottom Line

In conclusion, Tiangong International has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 69% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

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.