There Are Reasons To Feel Uneasy About Tianjin Construction Development Group's (HKG:2515) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Tianjin Construction Development Group (HKG:2515), it didn't seem to tick all of these boxes.

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Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Tianjin Construction Development Group, this is the formula:

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

0.069 = CN¥23m ÷ (CN¥710m - CN¥379m) (Based on the trailing twelve months to December 2024).

So, Tianjin Construction Development Group has an ROCE of 6.9%. In absolute terms, that's a low return, but it's much better than the Construction industry average of 5.5%.

Check out our latest analysis for Tianjin Construction Development Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tianjin Construction Development Group's ROCE against it's prior returns. If you'd like to look at how Tianjin Construction Development Group has performed in the past in other metrics, you can view this free graph of Tianjin Construction Development Group's past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Tianjin Construction Development Group's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 6.9% from 9.4% four years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Tianjin Construction Development Group's current liabilities are still rather high at 53% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In summary, Tianjin Construction Development Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 64% over the last year, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Tianjin Construction Development Group does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those can't be ignored...

While Tianjin Construction Development Group 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.