To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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 Tian Yuan Group Holdings (HKG:6119), we don't think it's current trends fit the mold of a multi-bagger.
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. Analysts use this formula to calculate it for Tian Yuan Group Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = CN¥35m ÷ (CN¥385m - CN¥38m) (Based on the trailing twelve months to December 2023).
Thus, Tian Yuan Group Holdings has an ROCE of 10.0%. On its own that's a low return, but compared to the average of 6.0% generated by the Infrastructure industry, it's much better.
Check out 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'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 Tian Yuan Group Holdings' past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
Things have been pretty stable at Tian Yuan Group Holdings, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Tian Yuan Group Holdings doesn't end up being a multi-bagger in a few years time.
What We Can Learn From Tian Yuan Group Holdings' ROCE
In a nutshell, Tian Yuan Group Holdings has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has gained an impressive 45% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
One more thing: We've identified 2 warning signs with Tian Yuan Group Holdings (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com