What Do The Returns At Gordon Auto Body Parts (TPE:1524) Mean Going Forward?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Gordon Auto Body Parts (TPE:1524) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Gordon Auto Body Parts, this is the formula:

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

0.028 = NT$100m ÷ (NT$5.2b - NT$1.6b) (Based on the trailing twelve months to September 2020).

Therefore, Gordon Auto Body Parts has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 4.7%.

See our latest analysis for Gordon Auto Body Parts

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

What Does the ROCE Trend For Gordon Auto Body Parts Tell Us?

While there are companies with higher returns on capital out there, we still find the trend at Gordon Auto Body Parts promising. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 48% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line

In summary, we're delighted to see that Gordon Auto Body Parts has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 88% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Gordon Auto Body Parts does have some risks, we noticed 4 warning signs (and 1 which is a bit concerning) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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