Stock Analysis

The Returns On Capital At Tan Chong International (HKG:693) Don't Inspire Confidence

SEHK:693
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What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Tan Chong International (HKG:693), the trends above didn't look too great.

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

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. The formula for this calculation on Tan Chong International is:

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

0.0056 = HK$71m ÷ (HK$18b - HK$5.4b) (Based on the trailing twelve months to June 2020).

So, Tan Chong International has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Retail Distributors industry average of 4.9%.

View our latest analysis for Tan Chong International

roce
SEHK:693 Return on Capital Employed March 8th 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tan Chong International's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Tan Chong International, check out these free graphs here.

What Does the ROCE Trend For Tan Chong International Tell Us?

We are a bit worried about the trend of returns on capital at Tan Chong International. To be more specific, the ROCE was 4.9% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Tan Chong International becoming one if things continue as they have.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. And long term shareholders have watched their investments stay flat over the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Tan Chong International (of which 1 is potentially serious!) that you should know about.

While Tan Chong 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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