What Can We Make Of Tianyun International Holdings Limited’s (HKG:6836) High Return On Capital?

Simply Wall St

Today we are going to look at Tianyun International Holdings Limited (HKG:6836) to see whether it might be an attractive investment prospect. 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 of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

So, How Do We Calculate ROCE?

Analysts use this formula to calculate return on capital employed:

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

Or for Tianyun International Holdings:

0.26 = CN¥216m ÷ (CN¥1.2b - CN¥354m) (Based on the trailing twelve months to June 2019.)

Therefore, Tianyun International Holdings has an ROCE of 26%.

View our latest analysis for Tianyun International Holdings

Does Tianyun International Holdings Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Tianyun International Holdings's ROCE is meaningfully better than the 10% average in the Food industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, Tianyun International Holdings's ROCE currently appears to be excellent.

You can click on the image below to see (in greater detail) how Tianyun International Holdings's past growth compares to other companies.

SEHK:6836 Past Revenue and Net Income, January 27th 2020
SEHK:6836 Past Revenue and Net Income, January 27th 2020

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Tianyun International Holdings.

What Are Current Liabilities, And How Do They Affect Tianyun International Holdings's ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.

Tianyun International Holdings has total liabilities of CN¥354m and total assets of CN¥1.2b. Therefore its current liabilities are equivalent to approximately 30% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.

Our Take On Tianyun International Holdings's ROCE

, Tianyun International Holdings shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

Tianyun International Holdings is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.