Tian Yuan Group Holdings Limited (HKG:6119) Earns Among The Best Returns In Its Industry

Isabel Galloway

Sun, Feb 10, 2019, 6:08 PM

Today we’ll look at Tian Yuan Group Holdings Limited (HKG:6119) and reflect on its potential as an investment. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

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

Or for Tian Yuan Group Holdings:

0.10 = CN¥35m ÷ (CN¥378m – CN¥16m) (Based on the trailing twelve months to June 2018.)

So, Tian Yuan Group Holdings has an ROCE of 10%.

View our latest analysis for Tian Yuan Group Holdings

Is Tian Yuan Group Holdings’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Tian Yuan Group Holdings’s ROCE is meaningfully better than the 7.1% average in the Infrastructure industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of where Tian Yuan Group Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. If Tian Yuan Group Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.