The Returns At Tianjin Tianbao Energy (HKG:1671) Provide Us With Signs Of What's To Come

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Tianjin Tianbao Energy (HKG:1671) and its ROCE trend, we weren't exactly thrilled.

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 Tianjin Tianbao Energy is:

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

0.047 = CN¥27m ÷ (CN¥810m - CN¥244m) (Based on the trailing twelve months to June 2020).

Thus, Tianjin Tianbao Energy has an ROCE of 4.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.8%.

Check out our latest analysis for Tianjin Tianbao Energy

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

So How Is Tianjin Tianbao Energy's ROCE Trending?

When we looked at the ROCE trend at Tianjin Tianbao Energy, we didn't gain much confidence. To be more specific, ROCE has fallen from 14% over the last five years. However it looks like Tianjin Tianbao Energy might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Tianjin Tianbao Energy's ROCE

To conclude, we've found that Tianjin Tianbao Energy is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 36% over the last year. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Tianjin Tianbao Energy does have some risks, we noticed 5 warning signs (and 1 which can't be ignored) we think you should know about.

While Tianjin Tianbao Energy isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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