The Returns At Hota Industrial Mfg (TPE:1536) Provide Us With Signs Of What's To Come

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Hota Industrial Mfg (TPE:1536) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Hota Industrial Mfg is:

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

0.035 = NT$422m ÷ (NT$18b - NT$6.0b) (Based on the trailing twelve months to September 2020).

So, Hota Industrial Mfg has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 4.7%.

Check out our latest analysis for Hota Industrial Mfg

In the above chart we have measured Hota Industrial Mfg's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hota Industrial Mfg.

What Can We Tell From Hota Industrial Mfg's ROCE Trend?

On the surface, the trend of ROCE at Hota Industrial Mfg doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 3.5%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Hota Industrial Mfg's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Hota Industrial Mfg have fallen, meanwhile the business is employing more capital than it was five years ago. And long term shareholders have watched their investments stay flat over the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 2 warning signs for Hota Industrial Mfg (1 is a bit unpleasant) you should be aware of.

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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. 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.
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