Our Take On The 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? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. That's why when we briefly looked at Tian Yuan Group Holdings' (HKG:6119) ROCE trend, we were pretty happy with what we saw.

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 Tian Yuan Group Holdings is:

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

0.12 = CN¥41m ÷ (CN¥413m - CN¥59m) (Based on the trailing twelve months to June 2020).

So, Tian Yuan Group Holdings has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 5.5% generated by the Infrastructure industry.

Check out 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're interested in investigating Tian Yuan Group Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 47% more capital in the last four years, and the returns on that capital have remained stable at 12%. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

What We Can Learn From Tian Yuan Group Holdings' ROCE

The main thing to remember is that Tian Yuan Group Holdings has proven its ability to continually reinvest at respectable rates of return. Yet over the last year the stock has declined 17%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

Tian Yuan Group Holdings does have some risks though, and we've spotted 3 warning signs for Tian Yuan Group Holdings that you might be interested in.

While Tian Yuan Group Holdings 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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This article by Simply Wall St is general in nature. 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.
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