Returns Are Gaining Momentum At Tongdao Liepin Group (HKG:6100)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 when we looked at Tongdao Liepin Group (HKG:6100) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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 Tongdao Liepin Group, this is the formula:

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

0.029 = CN¥90m ÷ (CN¥4.5b - CN¥1.3b) (Based on the trailing twelve months to December 2020).

Thus, Tongdao Liepin Group has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Interactive Media and Services industry average of 9.4%.

Check out our latest analysis for Tongdao Liepin Group

In the above chart we have measured Tongdao Liepin Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Tongdao Liepin Group here for free.

So How Is Tongdao Liepin Group's ROCE Trending?

The fact that Tongdao Liepin Group is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making four years ago but is is now generating 2.9% on its capital. In addition to that, Tongdao Liepin Group is employing 4,746% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 29%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line

Long story short, we're delighted to see that Tongdao Liepin Group's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a solid 36% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

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

While Tongdao Liepin 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.

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