Returns On Capital Are Showing Encouraging Signs At Tian Yuan Group Holdings (HKG:6119)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, we've noticed some promising trends at Tian Yuan Group Holdings (HKG:6119) so let's look a bit deeper.

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 Tian Yuan Group Holdings is:

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

0.12 = CN¥44m ÷ (CN¥457m - CN¥102m) (Based on the trailing twelve months to June 2021).

Thus, Tian Yuan Group Holdings has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Infrastructure industry average of 8.2% it's much better.

View our latest analysis for Tian Yuan Group Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tian Yuan Group Holdings' ROCE against it's prior returns. If you're interested in investigating Tian Yuan Group Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We like the trends that we're seeing from Tian Yuan Group Holdings. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. Basically the business is earning more per dollar of capital invested and in addition to that, 47% more capital is being employed now too. So we're very much inspired by what we're seeing at Tian Yuan Group Holdings thanks to its ability to profitably reinvest capital.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 22% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

Our Take On Tian Yuan Group Holdings' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Tian Yuan Group Holdings has. Given the stock has declined 24% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to know some of the risks facing Tian Yuan Group Holdings we've found 4 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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.

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