Tongdao Liepin Group (HKG:6100) Is Doing The Right Things To Multiply Its Share Price

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Tongdao Liepin Group's (HKG:6100) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Tongdao Liepin Group is:

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

0.054 = CN¥178m ÷ (CN¥4.9b - CN¥1.6b) (Based on the trailing twelve months to December 2021).

Thus, Tongdao Liepin Group has an ROCE of 5.4%. Ultimately, that's a low return and it under-performs the Interactive Media and Services industry average of 8.5%.

See our latest analysis for Tongdao Liepin Group

Above you can see how the current ROCE for Tongdao Liepin Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Tongdao Liepin Group is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 5.4% which is a sight for sore eyes. In addition to that, Tongdao Liepin Group is employing 4,982% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 32%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Tongdao Liepin Group has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Tongdao Liepin Group's ROCE

In summary, it's great to see that Tongdao Liepin Group has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 34% in the last three years. So researching this company further and determining whether or not these trends will continue seems justified.

Tongdao Liepin Group does have some risks though, and we've spotted 1 warning sign for Tongdao Liepin Group that you might be interested in.

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.

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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.