Slowing Rates Of Return At Tian Yuan Group Holdings (HKG:6119) Leave Little Room For Excitement

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Tian Yuan Group Holdings, this is the formula:

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

0.12 = CN¥42m ÷ (CN¥373m - CN¥24m) (Based on the trailing twelve months to June 2022).

Therefore, Tian Yuan Group Holdings has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 5.6% generated by the Infrastructure industry.

See 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 past earnings, revenue and cash flow.

The Trend Of ROCE

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 12% and the business has deployed 32% more capital into its operations. 12% is a pretty standard return, and it provides some comfort knowing that Tian Yuan Group Holdings has consistently earned this amount. 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.

Our Take On Tian Yuan Group Holdings' ROCE

To sum it up, Tian Yuan Group Holdings has simply been reinvesting capital steadily, at those decent rates of return. And given the stock has only risen 16% over the last three years, we'd suspect the market is beginning to recognize these trends. So to determine if Tian Yuan Group Holdings is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

If you want to continue researching Tian Yuan Group Holdings, you might be interested to know about the 2 warning signs that our analysis has discovered.

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. 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.