Returns On Capital Are Showing Encouraging Signs At Tongcheng-Elong Holdings (HKG:780)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 on that note, Tongcheng-Elong Holdings (HKG:780) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Tongcheng-Elong Holdings:

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

0.028 = CN¥409m ÷ (CN¥19b - CN¥4.2b) (Based on the trailing twelve months to December 2020).

So, Tongcheng-Elong Holdings has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Online Retail industry average of 3.6%.

See our latest analysis for Tongcheng-Elong Holdings

In the above chart we have measured Tongcheng-Elong Holdings' prior ROCE against its prior performance, but the future is arguably more important. 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 Tongcheng-Elong Holdings 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 2.8% which is a sight for sore eyes. Not only that, but the company is utilizing 1,312% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 22%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Tongcheng-Elong Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

In summary, it's great to see that Tongcheng-Elong Holdings has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a solid 37% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Tongcheng-Elong Holdings can keep these trends up, it could have a bright future ahead.

On a final note, we've found 2 warning signs for Tongcheng-Elong Holdings that we think you should be aware of.

While Tongcheng-Elong Holdings 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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