Tianjin Tianbao Energy's (HKG:1671) Returns On Capital Not Reflecting Well On The Business

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Tianjin Tianbao Energy (HKG:1671) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for Tianjin Tianbao Energy, this is the formula:

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

0.082 = CN¥42m ÷ (CN¥798m - CN¥287m) (Based on the trailing twelve months to June 2021).

So, Tianjin Tianbao Energy has an ROCE of 8.2%. On its own that's a low return, but compared to the average of 5.2% generated by the Electric Utilities industry, it's much better.

View 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 want to delve into the historical earnings, revenue and cash flow of Tianjin Tianbao Energy, check out these free graphs here.

The Trend Of ROCE

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 17% over the last five years. 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.

On a side note, Tianjin Tianbao Energy's current liabilities have increased over the last five years to 36% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 8.2%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From Tianjin Tianbao Energy's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Tianjin Tianbao Energy. These growth trends haven't led to growth returns though, since the stock has fallen 53% 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.

On a final note, we found 5 warning signs for Tianjin Tianbao Energy (1 is significant) you should be aware of.

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. 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.