Tiande Chemical Holdings (HKG: 609) could risk contracting as a business
Ignoring a company’s stock price, what are the underlying trends that tell us that a company is past the growth stage? Declining businesses often have two underlying trends, on the one hand, a decline to come back on capital employed (ROCE) and a decrease based capital employed. Basically, the company earns less on its investments and it also reduces its total assets. And from the first reading, things don’t look very good Tiande Chemical Holdings (HKG: 609), so let’s see why.
Return on capital employed (ROCE): what is it?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. Analysts use this formula to calculate it for Tiande Chemical Holdings:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.022 = CN ¥ 31m ÷ (CN ¥ 1.9b – CN ¥ 516m) (Based on the last twelve months up to December 2020).
So, Tiande Chemical Holdings has a ROCE of 2.2%. In absolute terms, this is low efficiency and it is also below the chemical industry average of 9.7%.
See our latest analysis for Tiande Chemical Holdings
Historical performance is a great place to start when looking for a stock. So above you can see the gauge of Tiande Chemical Holdings’ ROCE compared to its past returns. If you want to investigate further the past of Tiande Chemical Holdings, check out this free graph of past income, income and cash flow.
How are the returns evolving?
Tiande Chemical Holdings should be cautious as returns are trending downward. To be more precise, the ROCE was 20% five years ago, but since then it has dropped noticeably. During this time, the capital employed in the company remained roughly stable over the period. As returns decline and the company has the same number of assets employed, this may suggest that it is a mature company that has not seen much growth in the past five years. If these trends continue, we don’t expect Tiande Chemical Holdings to turn into a multi-bagger.
On the other hand, Tiande Chemical Holdings’ current liabilities have increased over the past five years to reach 27% of total assets, effectively distorting ROCE to some extent. If current liabilities hadn’t grown as much as they did, the ROCE might actually be even lower. Keep an eye on this ratio, as the business could face new risks if this metric gets too high.
Overall, lower returns for the same amount of capital employed are not exactly the sign of a dialing machine. So it’s no surprise that the stock has fallen 23% in the past five years, so it looks like investors are recognizing these changes. However, unless the underlying trends return to a more positive trajectory, we would consider looking elsewhere.
One more thing: we have identified 4 warning signs with Tiande Chemical Holdings (at least 1 which cannot be ignored), and understanding them would definitely be helpful.
While Tiande Chemical Holdings is not currently achieving the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
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