Investors Met With Slowing Returns on Capital At Tian Yuan Group Holdings (HKG:6119)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Tian Yuan Group Holdings (HKG:6119) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Tian Yuan Group Holdings is:

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

0.10 = CN¥38m ÷ (CN¥404m - CN¥34m) (Based on the trailing twelve months to December 2024).

Therefore, Tian Yuan Group Holdings has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Infrastructure industry average of 5.2% it's much better.

View our latest analysis for Tian Yuan Group Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Tian Yuan Group Holdings has performed in the past in other metrics, you can view this free graph of Tian Yuan Group Holdings' past earnings, revenue and cash flow.

What Can We Tell From Tian Yuan Group Holdings' ROCE Trend?

Things have been pretty stable at Tian Yuan Group Holdings, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Tian Yuan Group Holdings to be a multi-bagger going forward.

The Bottom Line

In summary, Tian Yuan Group Holdings isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 33% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you want to know some of the risks facing Tian Yuan Group Holdings we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing 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.