There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Tingyi (Cayman Islands) Holding (HKG:322) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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 Tingyi (Cayman Islands) Holding, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = CN¥3.6b ÷ (CN¥59b - CN¥32b) (Based on the trailing twelve months to June 2023).
Therefore, Tingyi (Cayman Islands) Holding has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 9.3% it's much better.
View our latest analysis for Tingyi (Cayman Islands) Holding
Above you can see how the current ROCE for Tingyi (Cayman Islands) Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Tingyi (Cayman Islands) Holding.
So How Is Tingyi (Cayman Islands) Holding's ROCE Trending?
Things have been pretty stable at Tingyi (Cayman Islands) Holding, 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. With that in mind, unless investment picks up again in the future, we wouldn't expect Tingyi (Cayman Islands) Holding to be a multi-bagger going forward. On top of that you'll notice that Tingyi (Cayman Islands) Holding has been paying out a large portion (100%) of earnings in the form of dividends to shareholders. These mature businesses typically have reliable earnings and not many places to reinvest them, so the next best option is to put the earnings into shareholders pockets.
Another thing to note, Tingyi (Cayman Islands) Holding has a high ratio of current liabilities to total assets of 55%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line
We can conclude that in regards to Tingyi (Cayman Islands) Holding's returns on capital employed and the trends, there isn't much change to report on. And with the stock having returned a mere 21% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One more thing to note, we've identified 1 warning sign with Tingyi (Cayman Islands) Holding and understanding it should be part of your investment process.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.