Some Investors May Be Worried About Tianjin Tianbao Energy's (HKG:1671) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Tianjin Tianbao Energy (HKG:1671), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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 Tianjin Tianbao Energy is:

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

0.095 = CN¥51m ÷ (CN¥810m - CN¥276m) (Based on the trailing twelve months to December 2020).

So, Tianjin Tianbao Energy has an ROCE of 9.5%. On its own that's a low return, but compared to the average of 5.7% generated by the Electric Utilities industry, it's much better.

Check out our latest analysis for Tianjin Tianbao Energy

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 Tianjin Tianbao Energy has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Tianjin Tianbao Energy's ROCE Trend?

On the surface, the trend of ROCE at Tianjin Tianbao Energy doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 9.5%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 34%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On Tianjin Tianbao Energy's ROCE

While returns have fallen for Tianjin Tianbao Energy in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 28% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Tianjin Tianbao Energy does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those is potentially serious...

While Tianjin Tianbao Energy 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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