What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in Tian Yuan Group Holdings' (HKG:6119) returns on capital, so let's have a look.
What Is 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 Tian Yuan Group Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = CN¥38m ÷ (CN¥393m - CN¥29m) (Based on the trailing twelve months to June 2024).
Therefore, Tian Yuan Group Holdings has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Infrastructure industry average of 5.2% it's much better.
View 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.
How Are Returns Trending?
Tian Yuan Group Holdings is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 31% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
In Conclusion...
To bring it all together, Tian Yuan Group Holdings has done well to increase the returns it's generating from its capital employed. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 20% to shareholders. So with that in mind, we think the stock deserves further research.
One more thing to note, we've identified 1 warning sign with Tian Yuan Group Holdings and understanding it should be part of your investment process.
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.
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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.